Quant hedge funds hit by US bonds sell-off

©Chris Batson/FT

Some of the world’s biggest quant hedge funds have suffered steep losses in the past two weeks following the sell-off in global bond markets.

So-called “CTAs”, which use computer models to automatically spot and ride market trends, were caught out as investors anticipated an end to the Federal Reserve’s measures to stimulate the US economy, triggering a global rout in fixed income investments.

AHL, the $16.4bn flagship fund of Man Group, the world’s second-largest hedge fund by assets, lost more than 11 per cent of its net asset value in the past two weeks alone as a result of its huge bond holdings, according to an investor.Bond yields have risen sharply from some of their lowest levels in decades in the past fortnight, leaving funds with large holdings badly hit. Many quant funds have been major buyers of bonds over the past few years as their algorithms have followed yields lower.

“Since mid-May it has been a perfect storm of some of the biggest trends in markets reversing all at once,” said a senior manager at one large quant fund. “It has been particularly brutal.”

News of the fund’s difficulties triggered a 15 per cent drop in Man’s share price on Wednesday.

Aspect Capital, another large European CTA, lost 6.4 per cent in May.

Geneva-based BlueTrend, the $14bn quant division of BlueCrest Capital run by Leda Braga, told investors its fund was down 4.4 per cent for the month as of May 24. The fund has yet to reveal losses incurred last week, but investors say they are likely to be high. BlueTrend runs a more volatile version of the same strategy as Man.

Sources at the funds say this week has also been painful and losses have been extended.

Most quant funds only privately communicate performance data with their investors on a weekly – or even monthly – basis.

Many of them have also had long positions on contracts linked to Japanese equities. The Nikkei has slumped 5.5 per cent so far this week, extending a month-long fall.

“May has rattled investors with large bond portfolios,” said Anthony Lawler, portfolio manager for hedge fund investor GAM. “Across all [hedge fund] strategies, trades that caused pain included long fixed income positions and long exposures to the many markets that reversed or were choppy, including energy, Japanese equities and soft commodities.”

Although CTAs are known to be volatile, the losses are still among the highest reported to investors in years – and have been spread broadly.

Graham Capital, the US’s largest CTA, was down 3.9 per cent for the month, while Holland-based Transtrend was down 3.1 per cent.

Winton, the world’s largest quant fund, managed to sidestep the worst of the losses. The London-based company dropped just 2.5 per cent in May, but is still up 6.5 per cent for the year.

Although almost all of Winton’s losses were attributable to US bond market moves, unlike its peers, Winton has moved to diversify its algorithmic trading programmes into cash equities and away from its traditional focus on futures contracts. The fund also operates with lower leverage than many of its rivals.