"Black box" hedge funds profit in volatile markets

Date: Thursday, August 25, 2011
Author: Laurence Fletcher, Reuters

Hedge funds run by sophisticated computer programs are profiting from large falls in stock markets and a rocketing gold price this month, even as funds managed by human beings struggle to cope with high market volatility.

Insiders say so-called managed futures funds, which try to latch onto market trends, are making money from declining bond yields and falling equities, as investors seek safe havens amid the eurozone debt crisis and after the U.S.'s credit rating downgrade.

These "black box" funds are up 4.2 percent so far this month, according to Hedge Fund Research's HFRX index, while the average hedge fund is down 4.0 percent and managers betting on rising and falling stock prices have lost a hefty 7.3 percent on average.

Man Group (EMG.L) has seen its flagship $23.9 billion AHL fund rise 4.3 percent -- making a profit of roughly $1 billion -- over the week to Monday, a regulatory filing from the company showed.

The gains take AHL to just 0.3 percent on average away from the level above which it earns performance fees.

Shares in Man -- the world's biggest listed hedge fund manager -- closed up 10.2 percent at 216.1 pence, while the FTSE 100 index closed up 1.5 percent.

"These are the environments in which we're expected to perform," said AHL portfolio manager Harry Skaliotis, who said AHL is long bonds, gold and base metals, and short equities.

In currencies it is short the dollar and long sterling, the yen and the Australian dollar.

"When you get real panic and concerns in the market you tend to see, across all asset classes, people ... running away from risky assets," Skaliotis said.

British blue chip index the FTSE 100 is down more than 10 percent so far this month on fears of an economic downturn and further problems in the banking sector, although Wednesday's rally may have eroded some managed futures funds' gains.

Meanwhile, Winton Capital, one of Europe's biggest hedge fund managers with $22.4 billion in assets, has seen its flagship fund gain 2.2 percent so far this month, taking year-to-date gains to 7 percent, according to a source familiar with the matter.

The fund, which like AHL is running a low level of risk compared with the rest of the sector, has also profited from shifting to a bet on falling stock prices in recent weeks, the source said.

It has also made money from gold, which on Tuesday rose above $1,900 an ounce, though it fell back below $1,800 on Wednesday.

"Managed future funds have profited from positions in precious metals, oil and agriculture," Gemma Godfrey, head of research at Credo Capital, told Reuters.

"In a volatile environment the ability to move quickly with focus on highly liquid investments, and profit when markets fall as well as rally, has proved useful. These funds trade to profit from macro events, and we've had plenty to rock markets recently," Godfrey said.

Elsewhere in the sector, SMN Diversified Futures fund, which made 58.5 percent in 2008's market chaos, is up 13.7 percent so far this month, according to its website.

However, not all computer funds have profited. Bluecrest's $10.15 billion Bluetrend fund is down 1.7 percent so far this month, said a source close to the company, although it is still up 4.2 percent this year.