Volatility means trend is no longer the hedge fund’s friend in 2018

LONDON (Reuters) – Trend-following hedge funds were stopped in their tracks by global market volatility this week, with some giving up all of their gains from a stellar start to the year.

Investors locked into steady moves had enjoyed strong gains as markets “melted up” with the aid of easy monetary policy that leading central banks have said they plan to tighten. But this week’s sudden halt in the trend has not sparked investor panic, fund managers contacted by Reuters said.

Performance statistics gathered by HSBC in the week to February 2 showed double-digit gains in January for a clutch of trend-following funds, after humanled hedge funds beat these machine-driven funds during 2017.

Four of the top-five best-performing funds in January ran algorithmic strategies, while only one was human-led, according to the data compiled by HSBC.

Among the trend-following funds to set the running were Netherlands-based Tulip Trend Fund, which was up 14.4% to January 31, and the Cantab Capital Partners Quantitative Fund, which had risen by 9.2% to January 26.

Aspect Capital’s Diversified fund made 8.8% in January, while Sweden’s Lynx Asset Management fund made 8.6% in January, according to its website.

But fears that rising inflation could prompt central banks to hit the monetary brakes more quickly prompted profit-taking, with US stocks posting their worst day in seven years on Monday and volatility surging, knocking trend followers.

As the sell-off accelerated and volatility rose, hedge funds sought to protect against further losses by hedging and also cut back on their use of leverage, Morgan Stanley said in a note.

As trend-following funds typically invest more heavily into their positions the longer the trend continues, including using leverage to amplify the bets, the falls were felt more keenly.

TULIP WILTS

The Tulip fund, named because of the association with its Dutch trading adviser’s homeland, was among those to give up gains, said Thomas Kummer at Progressive Capital Partners, which manages the fund.

“The fund was down around 6% on Friday and was down around [an estimated] 13% on Monday,” he said.

Another to suffer was Dunn Capital, whose WMA Institutional UCITS Fund had been up 10.1% in late January.

“We have given back the January profits in our WMA strategy like other trend followers have,” said Niels Kaastrup-Larsen, Dunn’s managing director for Europe.

This was to be expected from such a strategy when there were “big reversals in many sectors at the same time, he said.

Lynx’s fund was down 11.3% at the close on Tuesday, its website showed.

Anthony Lawler, cohead of GAM Systematic, which manages Cantab as part of its business, told Reuters the falls would be unlikely to change much in the mind of fund managers.

“The reversal moves in the past few days are not likely to scare systematic trend managers, as they are within expectations over a market cycle, and our risk management is built with the long term in mind,” he said.