Research

Billion Dollar Systematic Macro Hedge Funds Lose Close to 5% in February

This piece looks at the performance of CTA/managed futures hedge funds and its various sub-groups which have come under pressure during the difficult market environment of February. We conclude by looking at the returns for the industry heavy weight systematic macro hedge funds overseeing assets in excess of US$1 billion which recorded steep monthly losses in February declining 4.77%. In contrast to popular news insinuating that the recent market melt-down was the doing of a handful of AI hedge fund managers which recorded their worst monthly loss on record, it seems that the major casualties lie somewhere elsewhere.

Earlier in February 2018, CTA/managed futures hedge funds posted their worst monthly loss in more than a decade, down 4.31% with their sub-group of systematic trend following hedge funds contributing to the bulk of the losses with a decline of 7.16% as volatility levels spiked across the board. Equity futures contributed to the bulk of the losses for CTA/managed futures hedge funds as global equity markets saw broad based declines with managers hitting their risk limits. With energy and metals also coming under pressure during the month, commodity and metals focused hedge funds also saw declines posting losses of 1.53% and 1.75% during the month. The only bright spot for managed futures strategies came from the FX space where managers benefitted from their long positions in the US dollar and the Japanese Yen with underlying FX focused hedge fund managers delivering small modest gains of 0.65%. AI hedge fund managers, which have generally adapted to volatile market conditions much better compared to their traditional quant peers also came under pressure during the month posting their worst monthly decline on record since 2010 declining 3.28% in February.

Figure 1 compares the Eurekahedge CTA/Managed Futures Hedge fund Index and it’s sub-group of systematic trend followers, commodity, FX and metals focused hedge funds) with the Eurekahedge AI Hedge Fund Index. The AI hedge fund index tracks 28 funds historically (including dead ones to offset any survivorship bias in index values) and as of present tracks the performance of 17 live actively trading funds.

As can be seen in the figure below, AI hedge funds have outperformed traditional quants since 2010, delivering annualised returns of 9.32% over this period compared with 2.63%, 1.12%, -0.14%, 4.01% and -0.44% for CTA’s and sub-group of trend-followers, commodity, FX and metals focused hedge funds respectively.

Figure 1: AI hedge funds lead CTA/managed futures since December 2010
AI hedge funds lead CTA/managed futures since December 2010

Table 1 summarises the key performance statistics for CTA/managed futures hedge funds and their sub-groups relative to AI hedge fund managers. Key takeaways include:

  1. CTA/managed futures hedge funds have struggled to deliver good returns in the last five years, with 2014 being the only exception when the average CTA was up 9.83%, with underlying sub-group of trend following hedge fund managers up an impressive 13.49%.
  2. On a five year annualised basis, CTA/managed futures hedge funds have delivered gains of 2.63%, with weaknesses coming from underlying commodity and metals focused hedge funds which delivered below 1% annualised return.
  3. On both the three and two year annualised basis, CTA/managed futures hedge funds have posted negative Sharpe ratios (assuming a 1% risk free rate). The strongest returns over this period have come from exposure to metals with hedge fund managers focused on industrial/precious metals delivering three and two year annualised gains of 5.54% and 9.50%.
  4. In all periods depicted below barring 2012 and 2018 February year-to-date, AI hedge funds have posted better returns. Over all of five, three and two year periods, AI hedge funds have also delivered better risk adjusted returns as evidenced by the higher Sharpe ratios. A word of caution on this though, the AI hedge fund space is still evolving and developing and thus idiosyncratic factors across individual funds can impact overall index returns. The Eurekahedge AI Hedge Fund Index currently tracks US$1.8 billion in assets under management thus tall claims on AI hedge funds causing a ‘market melt-down or contributing disproportionately to market volatility’ should be scrutinised more closely.

Table 1: Performance in numbers – AI Hedge Fund Index vs. quants and traditional hedge funds

 
Eurekahedge CTA/Managed Futures Hedge Fund Index
Eurekahedge Trend Following Index
Eurekahedge Commodity Hedge Fund Index
Eurekahedge FX Hedge Fund Index
Sub-Group Metals (Precious & Industrial) Focused Hedge Funds
Eurekahedge AI Hedge Fund Index
2011
2.20%
0.71%
(1.51%)
7.80%
0.59%
14.09%
2012
2.79%
(1.86%)
(0.61%)
3.93%
(3.96%)
(1.63%)
2013
0.72%
1.02%
(5.85%)
3.58%
(16.42%)
10.56%
2014
9.83%
13.49%
3.68%
6.09%
(0.75%)
10.29%
2015
0.96%
(1.94%)
(4.63%)
6.25%
(6.39%)
15.18%
2016
1.95%
(1.02%)
6.95%
0.99%
15.69%
11.00%
2017
2.09%
0.44%
1.38%
(0.26%)
12.18%
9.88%
February 2018 year-to-date
(1.33%)
(1.97%)
0.24%
0.63%
(0.50%)
(1.48%)
5 year annualised returns
2.63%
1.74%
0.51%
2.93%
0.97%
10.71%
5 year annualised volatility
4.65%
8.03%
4.27%
2.44%
9.36%
4.27%
5 year Sharpe Ratio (RFR=1%)
0.35
0.09
(0.11)
0.79
0.00
2.28
3 year annualised returns
0.01%
(2.67%)
0.76%
1.98%
5.54%
10.12%
3 year annualised volatility
4.99%
8.90%
4.31%
2.34%
8.96%
5.00%
3 year Sharpe Ratio (RFR=1%)
(0.20)
(0.41)
(0.06)
0.42
0.51
1.82
2 year annualised returns
(0.29%)
(3.36%)
3.72%
(0.05%)
9.50%
8.08%
2 year annualised volatility
5.14%
9.33%
4.50%
1.81%
8.02%
4.74%
2 year Sharpe Ratio (RFR=1%)
(0.25)
(0.47)
0.60
(0.58)
1.06
1.49

Source: Eurekahedge

Table 2 shows the correlation matrix of CTA/managed futures hedge funds with respect to their peers identified. AI hedge funds have a small but positive correlation to CTAs which is statistically significant. It would be interesting to observe if AI hedge funds can maintain this edge over traditional quants as more AI funds are launched in the coming years.

Table 2: Correlation matrix
CTA/managed futures hedge funds and other hedge funds correlation matrix

We conclude this section by looking at returns of large systematic macro hedge funds, managing assets in excess of US$1 billion and comparing their performance over the years with the average CTA/managed futures hedge fund and AI hedge fund managers.

In February 2018, billion dollar systematic macro hedge funds posted their steepest loss since December 2010, declining 4.77% while the average CTA posted losses of 4.31% and the average AI hedge fund lost 3.28%. In fact, the range of returns in February for billion dollar hedge funds has been quite staggering with a spread of 18.25% between the best and the worst performing hedge funds as almost half of the reporting billion dollar systematic macro constituents posted losses in excess of -5.00%.

Taking a longer term view since December 2010, the average billion dollar systematic macro hedge fund has posted annualised gains of 4.49%, almost twice that for the average CTA which returned 2.63% though trailing the gains for AI hedge funds which are up 9.32%. Table 3 sheds more light on the returns for these heavy weights which have posted low single-digit gains in five of the seven years analysed below.

Figure 2: Billion dollar systematic macro hedge funds outperform CTAs yet trail AI hedge funds
Billion dollar systematic macro hedge funds outperform CTAs yet trail AI hedge funds

 

Table 3: Billion dollar systematic macro hedge fund returns since 2011

 
Billion Dollar Systematic Macro Hedge Funds Index
Eurekahedge CTA/Managed Futures Hedge Fund Index
Eurekahedge AI Hedge Fund Index
2011
3.47%
2.20%
14.09%
2012
6.41%
2.79%
(1.63%)
2013
1.80%
0.72%
10.56%
2014
15.94%
9.83%
10.29%
2015
2.77%
0.96%
15.18%
2016
0.59%
1.95%
11.00%
2017
4.08%
2.09%
9.88%
February 2018 year-to-date
(2.00%)
(1.33%)
(1.48%)
Annualised returns since December  2010
4.49%
2.63%
9.32%
Annualised standard deviation
6.78%
4.56%
4.45%
Sharpe Ratio (RFR 1%)
0.52
0.36
1.87

Source: Eurekahedge

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