A clutch of computer-driven hedge funds have profited from steep market losses in May, outperforming other hedge funds in a welcome turnaround for the black box sector that has struggled recently amid volatile markets.
Many of the outperformers were small and mid-sized funds that were more nimble and able to switch direction easier than the big established ones, investors said.
Some well known names such as $29 billion Winton Capital and $21 billion AHL failed to exploit losses spurred by renewed troubles in the euro zone in May after also disappointing investors by missing out on a brief rally earlier in the year.
The so-called managed futures sector uses complex algorithms to latch on to market trends either up or down to churn out profits. They are also known as commodity trading advisers, CTAs, because they started off by trading commodities but have since expanded futures for any asset class.
They attracted a surge of funds in 2009 after hefty gains during the 2008 financial crisis, but since then performance has been uneven.
"Recently it's been a bit too choppy for the strategy, but May was perfect conditions for them, with clear trends on all the major asset classes they trade," said Gabriel Garcin, a portfolio manager at Europanel Research & Alternative Asset Management in Paris, which invests in European hedge funds and CTAs.
The CTA index, compiled by research firm BarclayHedge, gained 2.6 percent in May, while its hedge fund index fell 2.8 percent.
Financial computer programs do best when markets move in strong trends, and most have struggled to profit amid choppy markets over the past year. ? In May, a downtrend was clear as Brent crude tumbled 14.7 percent, copper by 11.6 percent, the euro 6.7 percent and the S&P index <.SPX> by 6.3 percent.
A top performer was Chicago-based Clarke Capital Management, whose $49 million Millennium Fund soared by 46.5 percent and its $20 million Jupiter Fund by 39.7 percent in May.
Former computer programmer Michael Clarke, a veteran in the CTA sector since founding his firm in 1993, uses a "fuzzy logic" trend filter to confirm trading signals.
The Millennium Fund, which trades 42 markets and uses 22 computer models, has a volatile history, with a 95.5 percent gain in 2008 and a 48.3 percent loss the following year.
The fund's biggest winning positions in May were from shorting the euro and going long on bunds, with contributions from shorting gasoil, crude oil, cotton and coffee, Vice President of Operations Jim Andersen told Reuters.
Prior to May, several of the fund's computer models gave similar signals on the euro.
"When the price movement went our way in May, a majority of our trading models' positions were able to benefit from those moves, amplifying the gains," Andersen said.
Quantitative Investment Management's (QIM) $288 million Global Fund 3x jumped by 23.7 percent in May, according to performance information seen by Reuters.
QIM, headed by former Societe Generale trader Jaffray Woodriff, said in an investor newsletter that its bigger Global Program fund with $4.04 billion in assets, gained 7.17 percent last month by shorting the euro, the S&P index and crude oil.
"As the program is now at new highs, we would like to thank all of our investors who have weathered the storm with us," said Virginia-based QIM, whose Global Fund lost 4.5 percent in January and 1.4 percent in February.
Chicago-based Hawksbill Capital Management, run by former professional blackjack player Tom Shanks, saw its Global Diversified Program jump 16.13 percent in May. The $111 million fund made the bulk of its money on energy, currencies and European financials, it said in an investor update.
In the UK, Cantab Capital gained 7.32 percent in May mostly from positions on foreign exchange and interest rates. The Cambridge-based firm is run by former Goldman Sachs executive Ewan Kirk, who once headed the bank's quantitative unit.
BIGGER FUNDS LESS AGILE
While the overall CTA sector showed positive returns in May, many major funds were still struggling after they failed to profit from the market rebound early in the year.
Winton's main Futures Fund fell another 0.17 percent in May, bringing the yearly return to a 0.93 percent loss, and Man Group's AHL fund is down 0.7 percent through June 11.
"The largest guys ... seem to have got caught. Probably they are too big and too heavy on the markets, so they are less flexible and it takes more time to reverse from long to short," said an industry source who declined to be named.
The $14 billion BlueTrend Fund, part of manager BlueCrest and headed by Brazilian-born Leda Braga, has made a modest recovery and is up 1.75 percent this year through May after falling 2.5 percent in the first quarter.
Smaller CTAs are attracting more attention from investors who have been disappointed with returns from some of the big funds that dominate the industry.
Most trend-following CTAs made their money in the last few days of the month, said Jan Auspurg, managing director at AQ Advisors, which manages the 180 million euro AC Spectrum Fund.
"Most of them were positioned correctly, but the size of the positions was generally not that large as those trends were still developing," said Zurich-based Auspurg.
"Most systems made money towards the end of May as most markets had trended for three weeks, and then the market reaction at the end of May was even more pronounced," he said.
Spectrum, a UCITS fund, gained 6.0 percent in May, but losses earlier in the year meant the fund was down 2.0 percent so far this year.
(Additional reporting by Claire Milhench and Tommy Wilkes, editing by Jane Baird)
By Eric Onstad