Market turmoil is a boon for trend-following hedge funds

Market turmoil is a boon for trend-following hedge funds

By Neil Mackenzie

(Reuters) – Trend-following hedge funds are benefiting from market turmoil and geopolitical turmoil, with funds such as Graham Capital Management, Aspect Capital, AlphaSimplex and AQR Capital Management close to gaining 40% or more for the year.

These funds profit by buying or selling when the markets are making big moves and by riding that movement until it fades or the market changes direction.

They have thrived in the markets due to high inflation, high interest rates and the energy shock.

Stock market volatility – known as Wall Street’s fear gauge – has risen sharply since August, and the ICE (NYSE:) BofA index, which tracks US Treasury volatility, reached its highest level since March 2020.

Trend strategies work best when volatility levels are high, says Yao Hua Oi, director and co-head of macro strategies at $143 billion AQR hedge fund, which has one trend fund set for its best year to date, up 70%, according to For a source with knowledge of the topic.

โ€œThis is the kind of environment in which historically trend-following strategies tend to thrive and provide valuable diversification benefits,โ€ Oe said, noting how large investors have sometimes used portfolio hedge funds as an alternative source of revenue for traditional investments.

AQR is part of an index of the 10 largest trend-tracking hedge funds, compiled by Sociรฉtรฉ Gรฉnรฉrale (EPA:). The index is up nearly 37% this year, compared to a 3.8% increase in the data provider’s broader HFR index of hedge fund performance. BarclayHedge estimates that trend followers are $297 billion out of the $4.9 trillion hedge fund industry.

Other funds in the index also reported double-digit returns.

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Graham Capital Management’s least influential stock class of the Tactical Trend Fund is up 40% this year as of October 11, the Aspect Capital diversified fund is up 43.7% by the end of September, and Winton’s trend-following strategy is up 24.5%. So far this year, people familiar with the topic said.

Hedge funds Man Group, AlphaSimplex and Transtrend reported trend strategies with performance this year of around 15%, 48% and 31%, respectively.

GRAPHIC – Trend Following Hedge Fund Performance in 2022

“We do our best when things change, especially in ways that people don’t like,” said Catherine Kaminsky, chief research strategist at AlphaSimplex Group, which manages 7.8 billion pounds ($8.8 billion) in assets.

“In those environments, it is better to follow the markets than to ask what the markets should or should not do.”

Funds in the Sociรฉtรฉ Gรฉnรฉrale CTA Index include AQR Capital Management, AlphaSimplex Group, Aspect Capital, Systematica Investments, Graham Capital Management, ISAM LLP, Lynx Asset Management, Man Group’s AHL Fund, Transtrend and Winton Capital Management.

new era

“We’ve seen all of these disruptors emerge,” said Razvan Remsingh, director of investment solutions at Aspect Capital.

Parallel to the war in Ukraine, energy shortages in Europe and even a change in people’s behavior after the pandemic with the growing reality that central banks can no longer be relied on to smooth out volatility, there is clearly a “highly uncertain and divergent macro environment,” he says.

“This means more opportunities for us,” Remsing added.

The simultaneous declines in stock and bond portfolios, a huge spike in volatility and unexpected pricing in the market, says Robert Khoury, an independent hedge fund analyst, has created a perfect storm for trend-followers.

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โ€œThey were beating her with all the cylinders,โ€ Khoury said.

The ultimate help for trend followers was inflation, said Michael Harris, president of $2.6 billion Quest Partners, which is a 34.7% increase for the year, according to a person familiar with the matter.

Cheap money in the system and geopolitical risks mean supply problems and thus inflation. He said the world is facing a new system of monetary tightening and volatility.

Man Group and Statica Investments declined to comment.

(dollar = 0.8863 pounds)

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