This has been a bad hedge fund "trend" (2023)

One of the largest hedge funds in the world, BlueCrest Capital Management's BlueTrend, is trying to put its worst year ever behind it with positive returns, but it still faces challenges convincing investors to stay.

BlueTrend is up 3.34 percent net of fees this year through May, according to a person familiar with the returns. The fund swung to a gain after rising 6.32 percent last month by correctly predicting bond and stock price movements. That's already far better than the fund's poor performance in 2013 when it lost 11.5 percent—its first negative calendar year since launching a decade ago.

The problem is that many investors have decided to yank money from the so-called "trend following" strategy, also known as managed futures or commodity trading advisors. Such funds use computer models to predict trends in the prices of stocks, bonds, currency, commodities and other markets, betting that valuations tend to revert to a mean following swings up or down.

Leda Braga, President of BlueCrest Capital Management, attends the GAIM International (Global Alternative Investment Management) hedge fund conference in Monaco, June 15, 2010.

(Video) Why some hedge funds are about to 'close shop': Rajaratnam

Sebastien Nogier | Reuters

BlueTrend's assets have fallen nearly $7 billion over the last year, to $9.3 billion as of May 1, 2014, down from $16 billion as of May 31, 2013, according to BlueCrest marketing materials. About $3.7 billion of the decline represents actual investor redemptions, according to a person with knowledge of the situation.

A spokesman for Europe-based BlueCrest, which manages $30 billion overall and is led by Michael Platt, declined to comment.

BlueTrend is managed by one of the most powerful women in the hedge fund industry, Leda Braga. The fund's assets surged after 2008, when she produced a stellar 43 percent gain. Despite losses in 2013, BlueTrend has produced average annual returns of 10.7 percent since its inception in April 2004.

VIDEO3:3103:31

Global commodity trade

Halftime Report

(Video) Why Rich People Love Hedge Funds Despite Terrible Returns

BlueTrend isn't the only fund suffering. Money in managed futures funds have declined about 3.5 percent since the start of 2013 to $325.3 billion as of March 31, 2014, according to data tracker BarclayHedge. That's as overall hedge fund industry assets have surged, but more to other strategies such as stock picking and corporate activism.

Read MoreWho's ruling the hedge world? You'll never guess

"It's been a pretty difficult environment for CTA funds over the past several years, quite honestly, and last year certainly wasn't easy," said Eric Siegel, head of hedge fund research and management at Citi Private Bank.

Siegel highlighted two broad reasons for managed futures hedge funds' poor performance.

(Video) BFRND - Hedge Fund Trance

First is the continued intervention of central banks in the economy. The flood of money into the financial system has made the prices of many types of securities relatively stable. That hurts trend followers, who tend to gain more in volatile markets (the Newedge Trend Index, which tracks funds in the sector, gained 20.88 percent in 2008 when the markets crashed, for example).

Second is the continued low rate of return on cash because of interest rates near zero. Managed futures funds tend to have lots of cash on their books relative to other strategies because the futures contracts they invest with don't require that the full amount of the bet be paid upfront.

"It's a double whammy from central banks' accommodative stance," Siegel said. "That's really been the issue."

That challenging environment has caused continued poor performance at many funds. The Newedge CTA Index is up just 0.13 percent this year through May after a tepid 0.73 percent return in 2013. The similar Newedge Trend Index is down 1.96 percent so far in 2014 after a small 2.67 percent gain 2013. Both indexes lost money in 2011 and 2012.

Prominent managed futures firms have produced mixed returns so far in 2014, representative of their varied computer models.

How top managed futures funds performed

Fund Assets ($B) 2013 return 2014 YTD return 2014 date
Two Sigma Compass Cayman Fund500014.07%12.60%31-May
Man AHL Diversified9000 (all AHL)-3.10%5.50%31-May
Renaissance Institutional Futures Fund14602.15%4.89%23-May
BlueCrest BlueTrend9300-11.50%3.34%31-May
Winton Futures Fund104009.40%1.75%1-Jun
Newedge CTA IndexBenchmark0.73%0.13%31-May
Newedge Trend Index Benchmark2.67%-1.96%31-May
Graham Global Investment Fund7300 (firm)10.59%-2.98%31-May
Campbell Global Assets300012.58%-7.50%30-May
(Video) Hedge Funds Are Terrible Investments. So Why Do Rich People Keep Using Them? - How Money Works

Source: Source: Hedge fund databases, CNBC.com reporting

Read More

Performance has picked up recently this year—most funds made money in April and May—and investors may be rethinking their negative views on the strategy.

James Skeggs, global head of Newedge's advisory group—owned by Société Générale—said his unit has received more calls from clients in recent weeks about managed futures funds. He attributes the interest to a forward-looking view that central bank market intervention will ease, providing a better environment for the strategy.

"People are looking at it and going 'well, maybe going forward there is going to be more market movement, and strategies that are designed to capture that—that's maybe where we want to be,'" Skeggs said.

To be sure, central banks are not uniformily stepping back. On Thursday, for example, the European Central Bank imposed a negative interest rate on banks for their deposits and cut two other key rates.

(Video) The Bull Case for Stocks | David Keller, CMT | The Final Bar (08.09.22)

Read MoreDraghi breaks new ground with negative interest rate

By CNBC's Lawrence Delevingne

FAQs

What is bad about hedge funds? ›

High Fees. Another long-time staple of the hedge fund industry is the fee system. Most hedge funds have traditionally operated on what is known as the "two and twenty" fee. In this fee system, clients pay a management fee of 2% of their total assets to the managers of the hedge fund.

What is the hedge fund scandal? ›

One of the most infamous hedge fund scandals, former NASDAQ Chairman Bernie Madoff established Bernard L Madoff Investment Securities, LLC and ran a sophisticated Ponzi scheme through the hedge fund. Madoff in December 2008 admitted that his wealth management business was a multi-billion dollar Ponzi scheme.

What is hedge fund in simple words? ›

A hedge fund is an investment vehicle that caters to high-net-worth individuals, institutional investors, and other accredited investors. The term “hedge” is used because these funds historically focused on hedging risk by simultaneously buying and shorting assets in a long-short equity strategy.

What hedge fund just blew up? ›

MUMBAI: The turbulence at Archegos Capital Management, run by former hedge fund manager Bill Hwang, has sent shockwaves across financial markets from Singapore to New York. The family office based in New York was reported to be behind the 'unprecedented' block trades that took place on Friday in the US markets.

Why do most hedge funds fail? ›

Poor operations management. According to a Capco study, 50% of hedge funds shut down because of operational failures. Investment issues are the second leading reason for hedge fund closures at 38%. When breaking down everything that can go wrong, operations makes its case for number one.

What did hedge funds do to GameStop? ›

Melvin Capital, hedge fund torpedoed by the GameStop frenzy, is shutting down. The firm lost billions of dollars as it scrambled to cover its bets against the video game retailer that became a darling of retail traders. As a subscriber, you have 10 gift articles to give each month.

How corrupt are hedge funds? ›

If a new report about hedge fund corruption is to be believed, the industry is overrun with unethical and illegal activity. Some 46% of people at hedge funds believe their competitors break the law or act unethically and 30% say they've seen wrongdoing themselves.

Is hedge fund legal? ›

In the United States, hedge funds can be legally marketed to investors that satisfy certain standards of sophistication. 12 In addition, hedge funds can be marketed to the general public, provided all purchasers are accredited investors and certain other conditions are met.

What happens if a hedge fund fails? ›

First, the failure of a large fund (or a number with similar portfolios) could pose risks to banks and other creditors. If hedge funds had to liquidate a large market position quickly, prices could fall sharply, widening the circle of losses.

Who owns hedge funds? ›

Hedge fund management firms are often owned by their portfolio managers, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits.

Are hedge funds safe? ›

Hedge funds are riskier investments because they are often placing bets on investments seeking outsized, shorter-term gains,” she says. “This can even be with borrowed dollars. But those bets can lose.” Hedge funds take on these riskier strategies to produce returns regardless of market conditions.

How do hedge funds make money? ›

Hedge funds make money by charging a management fee and a percentage of profits. The typical fee structure is 2 and 20, meaning a 2% fee on assets under management and 20% of profits, sometimes above a high water mark.

Who lost 20 billion in 2 days? ›

Before he lost it all—all $20 billion— Bill Hwang was the greatest trader you'd never heard of. Starting in 2013, he parlayed more than $200 million left over from his shuttered hedge fund into ...

Was Bernie Madoff a hedge fund? ›

Madoff Investment Scandal

The Bernie Madoff scandal is truly the worst-case scenario for a hedge fund. Madoff was essentially running a Ponzi scheme with Bernard L. Madoff Investment Securities, LLC.

Are hedge funds unethical? ›

Critics argue that such entities are not equipped to deal with the losses that are possible with risky investing that is available to hedge funds. Others say that because hedge funds are not highly regulated, they engage in unethical practices or invest in assets that are harmful to the environment or society.

Videos

1. Gli Hedge Fund hanno PERFORMANCE migliore delle tue ?
(Marco Casario)
2. Hedge fund Melvin Capital weighs unwinding current fund to start new one: Sources
(CNBC Television)
3. The Rule by Larry Hite - Secret of Trend Following SUCCESS - (Book Summary)
(Read And Grow)
4. The 4 things it takes to be an expert
(Veritasium)
5. Why The Hedge Fund Industry Is A Complete Joke
(Wall Street Millennial)
6. Five Macro Trends Impacting Hedge Funds
(PartnerConnectEvents)
Top Articles
Latest Posts
Article information

Author: Rob Wisoky

Last Updated: 12/28/2022

Views: 6254

Rating: 4.8 / 5 (68 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Rob Wisoky

Birthday: 1994-09-30

Address: 5789 Michel Vista, West Domenic, OR 80464-9452

Phone: +97313824072371

Job: Education Orchestrator

Hobby: Lockpicking, Crocheting, Baton twirling, Video gaming, Jogging, Whittling, Model building

Introduction: My name is Rob Wisoky, I am a smiling, helpful, encouraging, zealous, energetic, faithful, fantastic person who loves writing and wants to share my knowledge and understanding with you.