Investors turn their backs on "robot" hedge funds


By Laurence Fletcher and Tommy Wilkes

LONDON, Oct 2 (Reuters) - Investors in the $330 billioncomputer-driven hedge fund sector are pulling out money for thefirst time since 2008, data showed on Wednesday, signalling thepossible start of a bigger exit from the industry.

These so-called CTAs (commodity trading advisors), whichemploy mathematicians and physicists to build programmes bettingon market trends, have been in demand since they racked up largeprofits during the credit crisis.

But big-name funds such as BlueCrest's BlueTrend, ManGroup's AHL and Cantab Capital's CCP fund have all runup sizeable losses this year as central bank actions disrupt thelong-running market trends they like to follow, leaving thesector on course for its third straight year of losses.

Investors pulled out $1.33 billion in the first half of thisyear, the first half-yearly outflow since 2008, data fromNewedge 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 investorsthey fulfil a viable role," said one prime broking executive,who provides hedge funds with services such as financing, stocklending and clearing of trades and who asked not to be named.

The outflows come as the wider hedge fund industry continuesto 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 piledinto these funds after the 2008-2009 financial crisis - andhelped fuel inflows of $130 billion between 2009 and 2012 - areyet to see a profit.

AHL, which has watched its assets slump to $11.6 billionfrom $24.4 billion two years earlier because of outflows andpoor performance, is down 8.3 percent since Jan. 1, whileBlueTrend is down 10.7 percent, performance data seen by Reutersshows.

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

Brevan Howard's $845 million Systematic Trading Master fundis down 3.1 percent in the first eight months of the year, asource with knowledge of the matter said. BH Global, afund that invests in Brevan's range of funds, has cut itsallocation to the Systematic fund this year, according to aregulatory filing.

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bucked thetrend and its Futures fund is up 3.4 percent, although earlierthis year Reuters reported that investors had withdrawn $1billion from its portfolios between May and December last year.

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

Winton and Brevan Howard declined to comment. Man Group didnot immediately respond to a request for comment. Cantab couldnot immediately be reached for comment.


Vast money-printing by central banks has hit CTAs by drivingup asset prices and distorting some of the relationships betweenassets on which they build their models. This summer, forinstance, CTAs lost money when stocks and bonds fell together.

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

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

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

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

"I think there's a case to be made to say that we're in abroad range-bound world," Lawler said. "Trend-followers needsustained trends and then a break out of a range. It doesn'tlook like that's going to happen for bonds."

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

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

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

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

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

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

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