In the midst of record cocoa prices and turbulent market conditions driven by inflation and geopolitics, hedge funds employing systematic strategies have outshone their counterparts in the first quarter, as per insights from industry insiders and investors.
Utilizing coding and algorithms to discern potential trades capable of morphing into market trends, systematic hedge fund managers diverge from traditional counterparts who personally make trade decisions.
In the initial two months of 2024, these trend-oriented funds saw an average gain of nearly 9%, in contrast to the broader hedge fund industry’s 2.6% increase, as outlined by Barclays’ prime brokerage, which monitored the performances of 40 “classic trend” hedge funds.
This success underscores the heightened volatility of markets and the diverging fortunes of markets globally, as indicated by sources.
While the U.S. S&P 500 has surged by over 11% since the beginning of the year, Hong Kong’s Hang Seng has experienced a decline of approximately 2%. Meanwhile, Japan’s Nikkei has rallied by over 20%, European stocks have lagged with gains of 6%, and China has seen an uptick of around 3%.
Amidst mixed performances in commodity markets, the steadfast ascent of cocoa to record highs has proven advantageous for systematic hedge funds.
The varied performances across regions and assets bode well for these funds, which thrive on market disparities, noted Michael Oliver Weinberg, a professor at Columbia Business School and hedge fund investor.
Weinberg emphasized, “It’s a great market for systematic managers, as they are typically equally long and short.” A long position signifies a bet on rising prices, while a short position indicates an expectation of an asset’s value declining.
In contrast to 2023, when concentrated positions in the “Magnificent Seven” U.S. tech stocks fueled most of the gains for the broader hedge fund industry, this year’s pronounced divergence within stocks, bonds, and commodities has created an ideal environment for such strategies, Weinberg suggested.
For instance, aerospace and defense stocks in Europe have surged by nearly 28% thus far in 2024, while utility stocks have witnessed a decline of approximately 7%.
Navigating Market Volatility
The top-performing systematic strategies or trend funds embraced higher levels of risk, employing varying volatility thresholds to determine when trades become excessively risky and warrant abandonment.
Barclays prime brokerage data, which tracks hedge funds and was shared with Reuters, revealed that the top 10 performing trend funds, allowing for nearly two-thirds more volatility than their peers, averaged approximately a 20% return in the first two months of the year.
Even funds with lower volatility thresholds benefited from significant movements in agricultural commodities, currencies, and energy, according to multiple sources.
Investment sources noted that long cocoa trades initiated since the first half of 2023 have bolstered returns, with cocoa prices more than doubling in the past year due to poor crops in leading producers Ivory Coast and Ghana, along with processors scrambling to secure cocoa beans.
British hedge fund firm Winton Capital, which permits a volatility of approximately 9% on its systematic $2.8 billion CTA (commodity trading advisor) strategy, recorded a positive 9.1% return for the year through March 20. This was attributed to profits from cocoa, stock indices, natural gas, and the yen, as per a source familiar with the firm.
Additionally, Rotterdam-based investment manager Transtrend, with approximately $5.4 billion in assets under management, saw returns of about 18% for the year through March 21, aided by long cocoa positions and short positions on grains. They also benefited from short bets against carbon emission permits.
Marc van Loo, part of Transtrend’s investor relations team, noted that unlike previous years where major events triggered substantial returns, this February saw robust returns primarily driven by the strength of trends in the first quarter.
Similarly, the $8.6 billion Aspect Capital, which returned 12% for the year through March 19, benefited from trends in cocoa, Chile’s peso, the yen, stock markets, and European emissions, according to a source close to the fund.
Razvan Remsing, director of investment solutions at Aspect Capital, highlighted the multifaceted sources of instability driving trend formation in the current macro environment, such as the effects of El Niño, interest rate normalization, and heightened geopolitical risks.
While these systematic hedge funds have capitalized on various market trends, fixed income has presented challenges given the uncertainty surrounding interest rate timing.