July 13, 2024

DealBook: Sluggish Market Stalls Funds That Thrive on Direction

Principals of Altis Partners, a managed futures fund, from left, Zbigniew Hermaszewski, Stephen Hedgecock, Natasha Reeve-Gray and Alex Brunwin.Christian KeenanPrincipals of Altis Partners, from left, Zbigniew Hermaszewski, Stephen Hedgecock, Natasha Reeve-Gray and Alex Brunwin.

Managed futures funds, which bet on the ups and downs of stocks, bonds, commodities and currencies, have been crowing for years about their performance during the financial crisis.

Now, some managers are eating crow.

The portfolios, also known as commodity trading advisers, are down 1.5 percent on average so far in 2011, in contrast to a modest 1 percent gain for the average hedge fund. Several prominent managers like the Man Group and AQR Capital Management are faring worse. Assets at Altis Partners, which manages about $1.4 billion in assets, have eroded by a fifth.

The weak returns offer a cautionary tale for investors chasing profits based on past performance.

With the markets in free fall in 2008, the typical managed futures fund returned 14 percent, versus an 18 percent loss for hedge funds. After that, investors poured tens of billions of dollars into futures-based strategies.

But the portfolios produced unremarkable returns in the years that followed the financial collapse, and they’re off to a rough start in 2011, owing to the stagnant market.

“These funds are supposed to be trend-following,” said Brad H. Alford, chief investment officer of Alpha Capital Management. “How can they all lose money at once?”

The funds, for their part, say they have always been volatile investments that pay out over the long term. Futures-based strategies have produced annualized returns of 11.41 percent since 1980, according to BarclayHedge, the research firm.

“We don’t give investors a smooth ride,” said Natasha Reeve-Gray, a partner at Altis.

“It’s not about working within a couple of months but within a couple of years,” she said. “We look at things on a three-to-five-year time frame.”

Typically, these managers do best when stocks, bonds, commodities or currencies are moving up or down. If a particular market is falling, managed futures traders, especially those using trend-following computer models, bet on the downward momentum and profit along with the decline. In a rally, they simply switch direction and try to ride it up.

But managers have a tougher time when markets aren’t clearly headed in either direction. While the Standard Poor’s 500-stock index is up about 4.5 percent this year, markets have been volatile amid the economic uncertainty in the United States and Europe.

AQR Capital Management, a large hedge fund based in the United States and founded by Clifford S. Asness, was down almost 3.8 percent as of the end of June. It has $1.7 billion in futures under management. The Man Group, the giant British hedge fund, is down about 7.5 percent in its $23.9 billion managed futures fund.

Smaller funds tend to suffer the most, say experts. The managers often rely on heavy amounts of borrowed money, amplifying the performance swings. By contrast, large funds like Winton Capital — which manages about $21 billion and deploys a relatively low amount of leverage — is up about 2 percent in mid-July, according to a person with knowledge of the fund.

“A lot of these smaller funds take on more risk to grow and get bigger,” said Greg N. Gregoriou, a professor of finance at the State University of New York, Plattsburgh.

The flood of money makes it only more difficult to navigate a lackluster market. Since 2008, industry assets have swelled 30 percent to nearly $300 billion. Some investors worry there is too much money fighting for a limited set of opportunities.

“The rise in speculative activity and the growth in assets may eventually show that situation where the music stops quickly and there are too many people looking for chairs that don’t exist,” said Troy W. Buckner, managing principal at NuWave Investment Management, a commodity trading adviser.

Herding around certain trades could worsen any market problems. If there is a sudden move, managers could simultaneously be forced to sell — putting further downward pressure on prices.

“That’s been a worry for generations, and I think the jury is still out,” said Scott H. Irwin, an agricultural economist at the University of Illinois at Urbana-Champaign.

A number of academic papers have studied the impact of computer-based trading, and “it’s very hard to find compelling evidence of them dragging prices up or down away from fundamentals and causing excess volatility,” Mr. Irwin added.

Despite the weak performance, investors have not lost their enthusiasm for managed futures funds. Commodity trading advisers have gathered more than $28 billion in net inflows so far this year, according to BarclayHedge. More money has come into Altis than has gone out every month this year, Ms. Reeve-Gray said.

In part, institutional investors are starting to aim at managed futures funds as part of an overall diversification strategy, say industry analysts, especially because they often do well in down markets. Long-term investors tend to be less concerned about erratic returns in a single year.

“For a long time it was a stepchild,” said Sol Waksman, president of BarclayHedge, referring to managed futures. “As time goes on, I think the whole sector is increasing in acceptability.”

Article source: http://dealbook.nytimes.com/2011/07/14/sluggish-market-stalls-funds-that-thrive-on-direction/?partner=rss&emc=rss

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