Trend-following hedge funds suffer sharp downturn in bank chaos

Trend-following hedge funds have suffered one of their worst monthly losses since the dot-com bust amid the bond market turmoil sparked by the recent banking crisis.

So-called CTA funds, which eVestment says have around $200 billion in assets under management, use algorithms to spot and capitalize on trends in global futures markets, but many have been caught off guard by a sudden reversal in US Treasuries after the Silicon collapse Valley Bank surprised.

Société Générale’s CTA index, which tracks the performance of 20 of the largest funds of its kind, fell 6 percent in two days after the California lender’s collapse and has continued to fall since. It fell 6.4 percent in the month ended March 30, the latest day for which data was available.

This would be the worst monthly performance since November 2001, another month in which shifting interest rate expectations caused historic swings in government bond yields.

Trend-following funds had benefited from the historic sell-off in bond markets over the past year, but many stalled when banking chaos triggered a sudden dive into ultra-safe US Treasuries.

“CTAs followed last year’s trend into this year,” said Edward Al-Hussainy, senior analyst at Columbia Threadneedle. “When trends reverse as quickly as they did in the banking crisis, CTAs are inevitably sidelined. It was particularly bad because they were overstuffed in short Treasury positions.”

Funds managed by firms such as Man Group, Aspect Capital and Systematica Investments were among those affected by the moves.

According to Commodity Futures Trading Commission data dating back to 1993, by February speculators had placed the largest collective bet on short-dated US Treasuries ever on the Société Générale trend indicator, which models these vehicles’ positions.

The run on Treasuries disrupted trading, forcing hedge funds to buy bonds to exit their losing positions.

The sudden shift in hedge fund positioning helped propel some of the biggest moves in the Treasury market since the 1980s, driving volatility to the highest levels since 2008.

CTA strategies are often offered to investors as a way to diversify from other assets. The SG Index had its best year ever in 2022, rising nearly 20 percent while the S&P 500 fell nearly 20 percent.

Ron Lagnado, research director at Universa Investments, said the way CTAs’ algorithms pick up signals means they perform well during slow corrections like last year, but may struggle when markets are “more unsettled.” .

“A perfect storm allowed [CTAs] to capitalize on what happened in 2022. . .[but]these sudden declines were not telegraphed.”