Trend-following hedge funds took a hit in August due to unfavourable bets on the New Zealand dollar and Japanese assets during a period of heightened market volatility, according to a report from Reuters, citing data from Societe Generale.
The bank’s analysis shows that these funds ended August with long positions in Japanese government bonds, US equities, and the Australian and New Zealand dollars. However, some of these asset classes, which are typically favoured by trend-following funds using algorithms to ride price movements, proved to be loss-making.
It was unclear whether the losses were tied to bullish or bearish positions at the time.
The worst-performing bets for hedge funds in August included 10-year Japanese government bonds, the Nikkei 225 index, and the New Zealand dollar, as well as the German and Italian stock markets, according to the SocGen report.
On the flip side, the Mexican peso, British pound, euro, blended gasoline, and US 2-year Treasuries, which had been losing trades for much of the year, turned profitable in August.
The market turbulence that impacted these funds was triggered by a reversal of crowded equity and foreign exchange trades prompted by the unwinding of large carry trades, where investors borrow in low-yielding currencies like the Japanese yen to invest in higher-yielding assets. The reversal created a feedback loop of falling equity prices, increased volatility, and forced hedge fund selling.
Although this volatility was short-lived, global stocks rebounded to record highs by the end of August.
Nevertheless, the market swings proved challenging for some trend-following funds, which saw double-digit losses, including Eclipse Capital Management, Drury Capital, and SEB Asset Management, all of which posted declines exceeding 10% for the month, the SocGen data showed.
Despite the August setback, Drury Capital Management and SEB Asset Management remain up for the year, with gains of 3.45% and 0.57%, respectively, through the end of August.
Hedge funds that focus on shorter-term trades fared better in August. Revolution Capital Management, Altiq, and Crabel Capital Management posted strong results, each recording gains between 3.8% and 4.5% for the month, according to SocGen.
Altiq declined to comment, while the other funds did not immediately respond.
