Trend-following hedge funds were stopped in their tracks by global market volatility this week, with some giving up all of their gains from a stellar start to the year.
Investors locked into steady moves had enjoyed strong gains as markets 'melted up' with the aid of easy monetary policy that leading central banks have said they plan to tighten. But this week's sudden halt in the trend has not sparked investor panic, fund managers contacted by Reuters said.
Performance statistics gathered by HSBC in the week to Feb. 2 showed double-digit gains in January for a clutch of trend-following funds, after human-led hedge funds beat these machine-driven funds during 2017.
Four of the top-five best-performing funds in January ran algorithmic strategies, while only one was human-led, according to the data compiled by HSBC.
Among the trend-following funds to set the running were Netherlands-based Tulip Trend Fund, which was up 14.4 percent to Jan. 31, and the Cantab Capital Partners Quantitative Fund, which had risen by 9.2 percent to Jan. 26.
Aspect Capital's Diversified fund made 8.8 percent in January, while Sweden's Lynx Asset Management fund made 8.6 percent in January, according to its website.
But fears that rising inflation could prompt central banks to hit the monetary brakes more quickly prompted profit-taking, with U.S. stocks posting their worst day in 7 years on Monday and volatility surging, knocking trend-followers.
As the sell-off accelerated and volatility rose, hedge funds sought to protect against further losses by hedging and also cut back on their use of leverage, Morgan Stanley said in a note.
As trend-following funds typically invest more heavily into their positions the longer the trend continues, including using leverage to amplify the bets, the falls were felt more keenly.
Tulip Wilts