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Graham Capital's Tropin says no more easy money by tracking stocks

·3 min read

By Nell Mackenzie

LONDON, Sept 5 (Reuters) - Kenneth Tropin, founder of the $18 billion hedge fund Graham Capital Management, said heightened economic uncertainty will make it harder to make money by tracking big stock indices.

A regime change awaits hedge funds that is likely to last, Tropin, who has spearheaded Graham Capital for the last 29 years, told Reuters late last week.

Tropin's portfolios are focused on "macro" trading, a strategy that uses economic and political views to find buy and sell signals in bonds, currencies and commodities.

The S&P 500 stock index, a broad measure of U.S. equities, is down almost 18% so far this year, on track for its first fall in four years and its biggest slide since 2008.

Global recession risks, rising interest rates and an inflation surge not seen in decades is leading investors to sell shares.

"Since 2003, equity focused hedge funds and funds that are correlated to beta have absorbed much of the growth in the hedge fund space," Tropin told Reuters.

But markets have changed, he noted. The same volatile economic backdrop that drove losses for many stock-focused funds also proved the perfect environment for a more traditional kind of hedge fund, like Tropin's. It takes advantage of big market swings to trade bonds, currencies and commodities.

Tropin added that stock-picking hedge funds, which have lost money this year, faced a tougher environment and that investors should stay away from more traditional "beta" trading strategies such as those tracking the S&P500.

Stockpicking hedge funds have seen their cumulative returns fall 12.24% in the 12 months ending July 31, according to investment data provider Preqin.

Tropin's portfolios also buys and sells stocks but tries to do so in a way that is uncorrelated to broader trends.

Computer-programmed algorithms which catch market moves that change in speed or momentum or find when assets are comparatively cheap or expensive account for the bulk of the money Graham Capital makes.

The hedge fund also uses fund managers to actively manage portfolios. These are geared towards "macro" trading.

Tropin's main, actively managed fund is up almost 20% this year so far, compared to other actively managed macro strategies which are up on average over 4% so far this year, Preqin numbers say.

Another fund, which uses a combination of human and computer led trading ideas, returned almost 30% for the same period. Tropin's computer-led macro fund is up by roughly 24%, for the year so far. The industry cumulative average, YTD is almost 3%.

Graham Capital also has a computer trend following fund which catches a market move once it has started and exits when the move slows down. This returned almost 33% so far this year, Tropin said.

Tropin says his success reflects how the hedge fund industry has changed. Since 2003, stock picking firms that tracked the rise of indices like the S&P500 have dominated success stories, but now the tables have turned. (Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and David Evans)