LONDON Hedge funds lost out on Tuesday after British Prime Minister Theresa May shocked markets by calling a snap election, but those led by humans outsmarted those led by machines, in a reversal of fortunes from the Brexit referendum.
While computer-driven hedge funds garnered plaudits for their outperformance in the wake of Britain’s shock vote to leave the European Union last year, this year’s first major test resulted in big losses.
Among the most high-profile losers was Connecticut-based investment firm AQR Capital Management’s $13.3 billion computer-driven Managed Futures Strategy, which lost 1.1 percent on Tuesday, according to an investor who was told by the hedge fund, representing a loss of more than $130 million.
The same strategy made 5.2 percent on the day the results of Britain’s EU referendum were revealed in June.
“The announcement of the general election was a turnaround for markets, leading to a trend reversal across UK assets, which hurts computer-driven hedge funds most,” said Philippe Ferreira, head of hedge funds research at Lyxor Asset Management.
Most of the hedge fund strategies run by machines that lost out from these moves did so because their algorithms simply follow market momentum. A break in the trends that those algorithms have spotted, therefore, tends to hurt them.
Tuesday’s surprise announcement sent sterling soaring to a six-month high above $1.29 with the currency jumping above its 200-day moving average and breaking the trading range of between $1.20 and $1.28 that had been in place since early October.
And Britain’s FTSE 100 stock index, which tends to move inversely to the pound, suffered its heftiest falls since the days following the Brexit vote, having hit record highs just last month.
Other computer-driven – or “quant” – hedge funds to lose out included Candriam Alternative Systematic, which lost 0.9 percent on Tuesday, with the steep fall in the FTSE penalizing its positions, according to a spokesman at the firm. Harmonic Capital was also marginally negative on the day, it said.
Two other hedge funds run by machines, which the investor declined to name, lost 2.8 percent and 1.9 percent.
MACHINES “DON’T GET EMOTIONAL”
Some computer-driven funds put on additional short positions in response to the news that there was set to be an announcement from the prime minister, amid speculation the news was set to be negative, such as that she was suffering from ill health.
“That element of uncertainty creates a sell signal – that might explain why (the computer-driven funds) didn’t do as well as the macro guys,” said Mizuho’s head of hedge fund currency sales in London, Neil Jones.
Computer-driven funds tend to mainly tracks general trends while human traders anticipate and react to macroeconomic events in the case of discretionary macro managers.
“The macro people are much more likely to wait to see what the announcement is, analyze that, and then make a trading decision.”
Human-led macro hedge funds, which mainly carry out bets through currencies and bonds, lost out but to a lesser degree on Tuesday.
“On performance of macro versus quant…discretionary macros were burned earlier this year so reduced risk, while quants tend to be always in the market — machines target risk and don’t get emotional,” said Cedric Fontanille, director at Unigestion.
Hugh Hendry’s Eclectica Asset Management lost 0.1 percent in its CF Eclectica Absolute Macro Fund for example, confirmed a spokesman at the firm, though he said the fund was not betting on sterling and had little direct exposure to the UK.
Goldman Sachs Global Strategic Macro Bond Portfolio lost 0.1 percent and the 21.6 billion euro ($23.15 billion) Carmignac Patrimoine fund lost 0.3 percent, said sources.
Some macro funds even made marginal gains on Tuesday, like Legg Mason Global Funds’ Western Asset Macro Opportunities Fund, which made 0.3 percent, and 25 billion pound ($32.01 billion) Standard Life’s Global Absolute Return Strategies Fund, which made 0.2 percent.
Macro hedge fund demand remains very strong, with the strategy taking in its largest monthly inflows since January 2010 in March, according to a report from industry tracker eVestment.
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(Reporting by Maiya Keidan and Jemima Kelly; Editing by Toby Chopra)