Black box hedge funds profiting from stock market falls, it is claimed

Hedge funds run by sophisticated computer programmes are profiting from large falls in stock markets and a rocketing gold price this month, even as funds managed by human beings struggle to cope with high market volatility, it is claimed.

Insiders say so called managed futures funds, which try to latch onto market trends, are making money from declining bond yields and falling equities, as investors seek safe havens amid the eurozone debt crisis and after the US’s credit rating downgrade.

These ‘black box’ funds are up 4.2% so far this month, according to Hedge Fund Research's HFRX index, while the average hedge fund is down 4% and managers betting on rising and falling stock prices have lost a hefty 7.3% on average.

Man Group has seen its flagship $23.9 billion AHL fund rise 4.3%, making a profit of roughly $1 billion, a regulatory filing from the company showed. The gains take AHL to just 0.3% on average away from the level above which it earns performance fees.

‘These are the environments in which we're expected to perform,’ said AHL portfolio manager Harry Skaliotis, who said AHL is long bonds, gold and base metals, and short equities.

In currencies it is short the dollar and long sterling, the yen and the Australian dollar. ‘When you get real panic and concerns in the market you tend to see, across all asset classes, people  running away from risky assets,’ Skaliotis added.

Meanwhile, Winton Capital, one of Europe's biggest hedge fund managers with $22.4 billion in assets, has seen its flagship fund gain 2.2% so far this month, taking year to date gains to 7%, a source familiar with the matter told Reuters.

The fund, which like AHL is running a low level of risk compared with the rest of the sector, has also profited from shifting to a bet on falling stock prices in recent weeks, the source said.
It has also made money from gold.

‘Managed future funds have profited from positions in precious metals, oil and agriculture. In a volatile environment the ability to move quickly with focus on highly liquid investments, and profit when markets fall as well as rally, has proved useful. These funds trade to profit from macro events, and we've had plenty to rock markets recently,’ said Gemma Godfrey, head of research at Credo Capital.

Elsewhere in the sector, SMN Diversified Futures fund, which made 58.5%  in 2008's market chaos, is up 13.7% so far this month, according to its website.

However, not all computer funds have profited. Bluecrest's $10.15 billion Bluetrend fund is down 1.7% so far this month, said a source close to the company, although it is still up 4.2% this year.