Quant hedge funds enjoy bumper start to 2024

Computer-driven hedge funds that bet on trends in financial markets are enjoying strong returns as bets on soaring cocoa prices and a sinking Japanese yen have borne fruit.

Quantitative funds have gained 12 per cent for the year to the end of March, according to an index compiled by Société Générale, with names such as Man Group, Aspect Capital and Winton among those profiting.

“We have been trading for 25 years and this was our best first quarter ever,” said Razvan Remsing, director of investment solutions at London-based quantitative hedge fund Aspect, which manages $9.4bn in assets.

After a more challenging 2023, the first few months of this year have proved to be enormously profitable for trend-following funds, which use algorithms to bet that market trends — either up or down — will persist.

British billionaire David Harding’s Winton had gained 13 per cent in its diversified macro fund, according to a person who saw the numbers. It benefited from bets on higher cocoa prices and against US natural gas and the yen.

Connecticut-based AQR had seen its managed futures full volatility strategy return 17.4 per cent to the end of March, while Paris-based Capital Fund Management’s IS Trends fund was up 17.5 per cent to Wednesday, according to people who have seen the numbers.

Bets on skyrocketing cocoa prices have been one of the biggest contributors to funds’ returns, as bad weather in west Africa, the region that produces the most cocoa beans, has hit yields. Cocoa bean futures in London have almost tripled in price since the start of the year.

Unusually high temperatures have also hit production of coffee beans, providing another avenue for quant funds to profit.

“Adverse weather in regions that produce coffee beans and cocoa has contributed to a supply shock, strengthening prices,” said Otto Hamaoui, director of portfolio management at Man AHL, a quantitative division of hedge fund firm Man Group.

Quants have latched on to numerous other market trends, including the weakening of the yen against the dollar, as a gulf has opened between rate expectations for the two countries. The yen has fallen 9 per cent since the start of the year and is down 30 per cent over the past three years.

Hedge funds have also made winning bets on oil prices, which have increased as tensions in the Middle East have risen.

The sheer number of opportunities across markets has emboldened funds to increase leverage in some assets and juice returns. Quant managers regularly adjust the derivatives contracts they hold to increase or decrease the size of their bets.

“When you see a number of markets experiencing trends, quantitative hedge funds capitalise on this with higher gross exposure,” added Hamaoui.

Hedge funds have become comfortable doing so because when a number of unrelated markets are trending — for instance the yen and cocoa — they generally believe their portfolios are better protected against sudden market reversals.

Aspect has increased its leverage from a long-term average of four times to seven times, meaning that for every dollar of investor money, they are exposed to seven times the market moves. However, it has reduced its position in cocoa, as the volatility in the price has increased the potential risk if the price suddenly tumbles.

Aspect’s flagship fund was up 21.4 per cent this year to the end of last week.

The returns mark a change in fortunes for trend following strategies, which were burnt following the collapse of Silicon Valley Bank in March last year. Many had been running large bets against bonds, which rocketed in price in a flight to safety and as investors questioned how much further the US Federal Reserve could raise interest rates.

However, many quants have managed to recover from these losses, with Société Generale’s Trend index up 45 per cent over the past three years.

“The 2010s were a lost decade for [trend followers], probably the worst in a century, but trend has been doing very well for the past three years,” said Philippe Jordan, president of Capital Fund Management.