In the first four months of the year, such quantitative funds rose an average of 15.1%. But over the period, the S&P 500 has fallen 13%.
Quant hedge funds have posted their biggest gains since the 2008 financial crisis amid this year’s market turmoil.
Trend-tracking hedge funds, which use mathematical models to try to predict market movements, have underperformed in an era dominated by central bank bond purchases. Because central bank bond purchases act as a stimulus tool, dampening much of the market volatility on which they depend. But the $337 billion industry is posting its biggest gain since the 2008 financial crisis, according to data provider HFR.
According to the FT, Leda Braga, founder of Systematica Investments and former head of systems trading at BlueCrest, said:
It’s a repeat of the 2008 moment, and everyone (trend followers) is doing well.
An underlying theme is that the decade we have been through is coming to an end.
His Blue Trend fund is up 26% so far this year, its best performance since 2008, and “it’s more volatile now.”
Also among the winners was BH-DG Systematic, a joint venture between David Gorton and hedge fund Brevan Howard, which has risen 32% so far this year. Aspect Capital, one of the world’s earliest CTA funds, has gained 29.2% for its diversified fund this year, its second-best year since 1999.
Such quantitative funds rose an average of 15.1% in the first four months of the year, HFR data show. But the S&P 500 fell 13% over the period, and many big-name fund managers posted double-digit losses. The hedge fund industry as a whole fell 1.9% in the first four months of the year.
These quantitative funds — also known as managed futures funds — earn income by capturing ongoing price trends in markets rising and falling, often allowing them to profit during times of market volatility. For example, during the 2008 financial crisis, they profited from the sharp rise in oil prices and the subsequent slump, and from the rapid sell-off in the stock market when the financial crisis bottomed.
These quant funds have made particularly big gains from shorting government bonds in recent times. Government bonds took a hit on expectations that the Federal Reserve will continue to raise interest rates sharply to combat high inflation. In addition, supply chain bottlenecks and the surge in energy and commodity prices driven by the crisis in Russia and Ukraine are also contributing factors.
Hedge fund returns have been subdued for years, before a big turnaround this year, according to HFR. Between 2011 and 2018, this trending investment was in the red for six years. One industry executive said the period after 2010 was a “dead decade” for trend followers.
However, high inflation, underestimated by central banks last year, catalyzed higher interest rates and an exit from quantitative easing. That weakened support for asset prices in traditional markets, sending bonds and stocks tumbling.
The IST Trend Fund, owned by Paris-based quantitative hedge fund firm CFM, is up 16.5% this year. According to the Financial Times, CFM president Philippe Jordan said: “Despite the impact this has had on asset prices, central banks must focus on fighting inflation. This is a positive outlook for Trend Fund as it creates power.”
Fund managers now generally agree that after a relatively sluggish period in the fund industry, changes in market mechanics mean the trend is likely to continue for some time.
Braga also stated:
Changes in inflation expectations feel like a big ship that will take time to turn around.
He pointed to decarbonization and changes in supply chains as drivers of inflation, and “the cycle seems to be longer ahead, and I think that trend will continue for some time.”
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