Hedge fund Winton is suffering one of its worst runs on record after its stance against simple trend-following appeared to backfire.
The London-based group, a pioneer of computer-driven investing with about $20bn in assets, has lost almost 13 per cent in its flagship hedge fund this year to the end of March, including a 7.5 per cent drop last month, according to numbers sent to investors and seen by the Financial Times. That puts the fund on track for its worst calendar year in its 22-year history.
By contrast, funds that latch on to rises or falls in certain markets and seek to piggyback on the moves have fared better. Winton’s sub-par performance suggests that chief executive David Harding’s querying of the profitability of this strategy — known as trend-following — may have been misplaced.
Mr Harding surprised fellow algorithm-focused investors in 2018 when he said trend-following had become a victim of its own success. With too many funds all trying to ride similar market moves, returns had been squeezed, he said. Low volatility in post-2008 market conditions also hampered the strategy.
Last year Mr Harding told the Financial Times that “on its own, long-term trend-following is scarcely good enough to run a hedge fund on”. The flagship Winton fund, which once focused solely on trend following, cut its exposure to this strategy to about 25 per cent of its portfolio. Instead, it built up strategies that use macroeconomic data to trade markets such as currencies and bonds, as well as those trading stocks and credit.
But other funds stuck to the course. Man Group’s AHL, a fund co-founded by Mr Harding in the 1980s (he is the “H” in the name) and now a competitor to Winton, is posting some of its strongest performance in years. Over the first three months of 2020 its AHL Diversified fund, a trend-follower, gained almost 11 per cent.
Other trend-following funds are enjoying a long-awaited revival. GSA Capital, which was formerly the global statistical arbitrage desk at Deutsche Bank before spinning out in 2005, has lost money in recent years in its Trend fund. But this year it is up 5.5 per cent. Leda Braga’s Systematica, which lost more than 10 per cent in 2016 and 2018, has gained 9.4 per cent this year.
This outperformance is widespread. Société Générale’s index of trend-following funds gained 1.8 per cent last month, while the S&P 500 lost 12.5 per cent.
“What did best were managers doing only trend,” said Anthony Lawler, head of GAM Systematic. Its Core Macro fund, for instance, lost a modest 3.7 per cent last month — its trend-following strategies made money, while other strategies were down.
While trend-followers entered the crisis with long positions in stocks, many eventually cut back or switched to betting on falling prices as markets tumbled. Some were able to profit from bets against the oil price — which slumped — and from holding bonds, which surged as investors looked for havens.
Many hedge funds have had a disappointing year, but by its own standards, Winton’s recent performance has been poor. The flagship fund, which chalked up double-digit gains in nine of its first eleven calendar years of trading, has previously posted only four negative years, all of them with losses of less than 5 per cent. The latest figures mean that, since the start of 2015, the fund has lost almost 6 per cent.
A separate fund, Winton Diversified, which has around half its assets in trend-following, is down about 7 per cent this year.
The range of gains and losses reflects the savagery of the market moves, as well as the increasing diversification of a quant hedge fund sector that once focused mainly on trend-following but has now developed models in a range of new areas. Mick Swift, chief executive at Abbey Capital, which invests in quant funds, said the spread of funds’ performance was about 2.5 times bigger than on average historically.
But while many trend-followers made money in March, they are still well short of their heyday during the 2008 financial crisis, when they made more than 18 per cent on average, according to data group HFR.
“It does seem [managed futures] returns were much more mixed in March compared to the fall of 2008,” said Akshay Krishnan, head of macro and trading strategies at Stenham Asset Management, an investor in hedge funds which manages about $4bn in assets.
However, those higher returns may still come as the coronavirus crisis plays out. These funds “have never been something to rely on at turning points”, said Mr Lawler of GAM Systematic. “March was a turning point, and now we will see how they perform.”