February a Bad Month for Quants

March 26, 2018 James Heinsman Hedge Fund News

This past February marked the worst performance month for quantitative hedge funds in 17 years. These hedge funds, which rely on following trends and computer-based analysis were fooled by the steady upward movement of stocks ending in a sudden downturn, one of the fastest market corrections in history.

Commodity trading advisors” (CTAs) or managed futures funds, which surf the momentum of markets, made big bets in January based on last year’s rally, which ended in the best monthly equity fund inflows of money since 1987.

But in early February the sustained growth stalled suddenly, side-swiping trend-followers. It was the worst time for these systematic hedge funds since November of 2001.

“Trend-followers are either long or short equities on any given day. Obviously, after a significant upward move, they were likely to be long and therefore vulnerable to a quick downward move,” said Sushil Wadhwani, the head of Wadhwani Asset Management.

The reversal was so large that most quantitative trend-following hedge funds are now posting minus growth for the year. Despite the bad results some observers do not believe investors will be dissuaded from bets on CTAs.

“We don’t think investors who truly understand the strategy are nervous. They may hold off a little before allocating more to the space this year, but I’d be surprised if sophisticated investors meaningfully reduce their CTA exposure as a result of February performance,” said Marlin Naidoo, global head of capital introductions at Deutsche Bank.

Commodity trading advisors, CTA, Marlin Naidoo, Sushil Wadhawani,

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