Quantitative Hedge Funds Hit Hard by Slumping Equities

Amid a sudden tumble of US stock index prices, many quantitative, computer-driven hedge funds have endured a major downward slump since the start of the year.

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These quantitative hedge funds are notorious for following market trends, and riding the wave toward profitability, as they attempt to dissect the turning point of each trend to decipher the appropriate exit point.

The sudden turn in the stock market, which had been on a historic bullish run, caught many hedge funds by surprise, and they consequently paid the price, recording substantial losses in the process.

The Financial Times (FT) recently published an article on hedge funds known as Commodity Trading Advisers (CTAs), and attributed the big losses to a heavy investment in US Equities Equities Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling pa Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling pa Read this Term.

On the heels of 2017’s strong performance of the equities market, the bullish sentiment among CTAs was exemplified by the largest monthly flow of funds into equities, since January of 1987.

Since the nature of CTAs is to follow market trends, it makes sense that when the market took a swift downturn, these hedge funds were hit very hard.

According to the FT, CTAs endured their poorest monthly performance since November 2001, as the Société Générale’s CTA index has dropped 5.55%, despite the market’s more recent recovery.

Hedge Funds Lose Big

While the CTA index has shed over 5.5% of its value, many hedge funds took a more significant beating, due to heavy market investments and trend chasing.

Man AHL’s $1.1 billion fund shed approximately 10% of its value in a period of just over 2 weeks, from February 1 through 16. Meanwhile, AHL Evolution and Alpha funds also endured losses of between 4% to 5%, during the same period.

Some of the biggest losses in percentage were seen by Lynx Asset Management and GAM’s Cantab Capital, which shaved off 12.7%, and 9.5%, respectively.

Roy Niederhoffer’s managed fund took a major hit in the market’s slump, dropping 21.1% from the start of February through the 20^th of the month.

Further explaining the reasons for the heavy losses is Head of Wadhwani Asset Management, Sushil Wadhwani, who said: “Trend-followers are either long or short equities on any given day. Obviously, after a significant upward move, they were likely to be long and therefore vulnerable to a quick downward move.”