Hedge funds lose on UK election shock, but man less than machines

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 US$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 US$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 US$1.29 with the currency jumping above its 200-day moving average and breaking the trading range of between US$1.20 and US$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…

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