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Investors turn their backs on "robot" hedge funds

Date: Thursday, October 3, 2013
Author: Laurence Fletcher and Tommy Wilkes, Reuters

Investors in the $330 billion computer-driven hedge fund sector are pulling out money for the first time since 2008, data showed on Wednesday, signaling the possible start of a bigger exit from the industry.

These so-called CTAs (commodity trading advisors), which employ mathematicians and physicists to build programs betting on market trends, have been in demand since they racked up large profits during the credit crisis.

But big-name funds such as BlueCrest's BlueTrend, Man Group's (EMG.L) AHL and Cantab Capital's CCP fund have all run up sizeable losses this year as central bank actions disrupt the long-running market trends they like to follow, leaving the sector on course for its third straight year of losses.

Investors pulled out $1.33 billion in the first half of this year, the first half-yearly outflow since 2008, data from Newedge and BarclayHedge shows. Figures from Hedge Fund Research (HFR) show $1.08 billion left in the second quarter alone.

"CTAs are going to have a hell of a job convincing investors they fulfill a viable role," said one prime broking executive, who provides hedge funds with services such as financing, stock lending and clearing of trades and who asked not to be named.

The outflows come as the wider hedge fund industry continues to attract cash, despite concerns over returns.

So far this year the average CTA is down 3.5 percent, according to HFR, meaning most of the pension funds who piled into these funds after the 2008-2009 financial crisis - and helped fuel inflows of $130 billion between 2009 and 2012 - are yet to see a profit.

AHL, which has watched its assets slump to $11.6 billion from $24.4 billion two years earlier because of outflows and poor performance, is down 8.3 percent since January 1, while BlueTrend is down 10.7 percent, performance data seen by Reuters shows.

Cantab Capital's CCP fund has lost 26.3 percent this year and, despite inflows over the summer, last month saw $75 million of net outflows, said a source who had seen the numbers.

Brevan Howard's $845 million Systematic Trading Master fund is down 3.1 percent in the first eight months of the year, a source with knowledge of the matter said. BH Global (BHGG.L), a fund that invests in Brevan's range of funds, has cut its allocation to the Systematic fund this year, according to a regulatory filing.

Winton Capital, which runs $24.5 billion, has bucked the trend and its Futures fund is up 3.4 percent, although earlier this year Reuters reported that investors had withdrawn $1 billion from its portfolios between May and December last year.

"Our allocation to CTAs is very low at around 4 to 5 percent," said one fund of hedge funds manager who requested anonymity. "We're trying to figure (out) if this (the poor returns) will change."

Winton, Brevan Howard and Man Group declined to comment. Cantab could not be reached for comment.


Vast money-printing by central banks has hit CTAs by driving up asset prices and distorting some of the relationships between assets on which they build their models. This summer, for instance, CTAs lost money when stocks and bonds fell together.

"In these markets you may be able to express a view with an equity long-short position, but if you need to maintain your exposure for some time like certain trend-followers it's very difficult," said Roberto Botero, at hedge fund investor Sciens Capital, which has been underweight CTAs for more than a year.

The central banks' actions can also limit the trends that these funds like to follow, by creating trading ranges.

Anthony Lawler, a portfolio manager at Swiss asset manager GAM, said he is "materially underweight trend followers". He argues the Fed's actions may have created a trading range for U.S. bonds, one of the assets most actively traded by CTAs.

The worry is that, in anticipating the Fed will wind down bond purchases, investors push up yields, threatening economic growth and leading the Fed to cancel its planned tapering.

"I think there's a case to be made to say that we're in a broad range-bound world," Lawler said. "Trend-followers need sustained trends and then a break out of a range. It doesn't look like that's going to happen for bonds."

Meanwhile, data from Systematic Alpha, a CTA fund, suggest these funds have lost two key attributes that attracted clients.

Using comparisons of the Barclays CTA index and the S&P 500 for five years from January 2009, the so-called "sharpe ratio" - a measure of risk-adjusted returns - has tumbled to 0.06. This compares with 0.66 over the 13 years from 2000.

And their negative correlation - the ability to profit when markets fall and vice versa, which institutional investors value as a safeguard for their portfolios - has also disappeared.

Whereas the sector was negatively correlated to the S&P index over the 23 years from 1990 and the 13 years from 2000, it was positively correlated over the five years from 2009.

Troy Gayeski, partner at fund of funds firm Skybridge, sold most CTAs in 2009. He questions whether poor returns in 2011, when conditions were favorable, are a sign the sector's volume of assets will prevent the return of good performance in future.

"That's the million-dollar question," Gayeski said. "Up until 2011 we thought there was no evidence for that, but 2011 made us question the use of CTAs in general."