Hedge Funds Bounce Back

Terry Flanagan

For hedge funds, the end of 2011 cast a net of negativity. The absolute return managers trailed the S&P 500 index by 8% in 2011, according to Reuters.

Yet, in 2012, hedge funds are slowly regaining their steam. The industry’s assets dipped in late 2011 as the fourth quarter experienced an outflow of $127 million due to global market volatility, but now stands back above the $2 trillion mark.

The turnaround of hedge fund is mostly attributed to the reversal of market sentiment, macroeconomic trends and volatility, according to Kenneth Heinz, president of Hedge Fund Research. According to HFR research, positive performance in early 2012 was led by event driven, relative value arbitrage and global macro—precisely the same strategies that took a dip in late 2011, according to the Dow Jones Credit Suisse Hedge Fund Index.

While certain hedge fund strategies have been highlighted as of late, one particularly stands out as a volatility-proof, time-tested strategy: commodity trading advisors (CTA) which practice managed futures.

A CTA’s success typically prides itself on its quantitative methods, with technical and statistical analysis used to devise when to get in and out of the market over emotional trading. Despite its recent popularity, some managed futures practitioners argue that the strategy’s success has been long-standing in the markets.

“Managed futures have been successful over a long period of time—16 years, for us,” said Greg Anderson, chief investment officer of Princeton Futures Strategy Fund, which holds a portfolio of diversified CTA managers across commodities, currency futures, interest rate futures and equity index futures.

Princeton’s key differentiating factor among the CTA world is its ability to profit from a diverse array of managers across the trading spectrum—short-term, intermediate and long-term, all in accordance to pre-configured mathematical models.

In a bare bones way, some market participants may make parallels between trend following strategies and high-frequency trading, which also relies on highly calibrated models to make speedy, repetitive trades. Not so, said Anderson, who attributes Princeton as having intelligence behind their trades.

“We’ve been able to capture trends through time diversification through the different ways systems are designed,” Anderson told Markets Media.

“Trend is in the eye of the beholder. Our short-term managers trade intraday and weekly, and those on the longer end may hold positions up to two to three years. So today’s news might just be market noise. They might still be on one trade, as markets continue to move up.”

Since 2007, CTAs and global macro managers’ assets have increase by 50%, while long/short equity managers have seen their assets decline by 21%, cited Don Steinbrugge of hedge fund consulting firm Agecroft Partners.

Both CTA and global macro firms experienced gains last month, despite the volatile commodities sector and a trend-following environment, according to HFR. The HFRI Macro Index, which gained 1.2% in February, has gained 2.4% year-to-date despite declines across most commodity-focused hedge funds. Systematic trend following macro funds gained just over 1% in February and 1.5% for 2012 so far.

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