Clifford Asness's trend-following mutual fund was on a hot streak until a rally in European bonds and the U.S. dollar took a turn last month.
The $8.3 billion managed futures fund run by Mr. Asness' AQR Capital Management, the largest of its kind, had rallied 8.6% in the first quarter, benefiting from stable trends in the bond, commodity and currency markets. Then, in mid-April, markets turned and the AQR Managed Futures Strategy Fund slumped 6% in less than one month.
The fund isn't the only one being caught off guard. Similar strategies from Pacific Investment Management Co. and Natixis Global Asset Management, which mostly use mathematical models to wager on rising assets and falling assets, have slumped as European stocks and bonds have sold off, the U.S. dollar weakened and oil prices rebounded from a six-year low. That's interrupted the best run for these hedge-fund like offerings in more than five years and threatens to diminish their popularity with retail investors, who've flocked to them in record numbers.
“Several of the trends that have been driving recent results — in particular a strong dollar and declining oil prices — reversed course,” said Josh Charlson, director of manager research for alternative strategies at Chicago-based Morningstar Inc.
In addition to shifts in the currency and commodity markets, bond prices tumbled globally as investors turned against record-low yields. German bonds fell sharply towards the end of last month as signs of euro-area inflation caused investors to scale back on bets that the European Central Bank's bond-buying program will increase prices.
2014 COMEBACK
Managed futures funds, known for charging some of the highest fees in the industry for complex strategies usually reserved for sophisticated investors, posted lackluster returns since 2009 even as the stock market rallied for six straight years.
They made a comeback in the past year, with managed futures mutual funds in the U.S. gaining 9.1% on average in 2014, and 5.6% in the first quarter of this year, according to Morningstar. That performance helped attract $1.4 billion in the first two months of the year, including a single-month record of $800 million in January, before their streak ended.
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The strategy has benefited in part from trends arising from the actions of central bankers. The ECB's purchase of sovereign debt to stimulate the eurozone drove a rally in European bonds that contributed to returns in the first quarter. The U.S. dollar's strength also continued to be a sure bet as the ECB and Bank of Japan try to stimulate their economies, while the Federal Reserve indicated it plans to increase interest rates.
“We feel central bank divergence set the stage nicely for managed futures strategies,” said Lee Partridge, chief investment officer of Houston-based Salient Partners, which runs a $51 million managed futures mutual fund. “That exacerbated currency differentials,” which allows managers to exploit such trends to their advantage.
The Salient Pure Trend mutual fund has tumbled 10% since mid-April. Oil, which helped drive performance last year, has been “a modest headwind as we have seen a rebound in prices,” said Mr. Partridge.
The Salient fund had gained almost 7% in the first quarter and returned 22% in the prior three months. The fund was helped in the first quarter by a rally in European stocks and a rebound in emerging markets.
PIMCO, NATIXIS
The $474 million Pimco TRENDS Managed Futures Strategy Fund, run by Newport Beach, Calif.-based Pimco, has lost 7.7% since April 15. The fund had gained about 2% in the first quarter and returned 21% last year, benefiting from the continued decline in interest rates.
Natixis's $2.3 billion ASG Managed Futures Strategy Fund made money last year from betting on global bonds and Japan and European equities, said Duncan Wilkinson, chief executive officer of AlphaSimplex Group, the firm that runs Natixis's managed futures strategy. The fund posted a more than 11% return in the first quarter and a more than 20% gain last year. Since mid-April, it has declined 8.6%.
AQR's fund gained 9.7% last year mostly from wagering on falling oil prices and the strengthening of the U.S. dollar. The gains in the first quarter primarily came from an increase in global equities and bonds.
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“We have witnessed over the past nine months or so a combination of some pretty major persistent trends happening across many markets globally,” said Yao Hua Ooi, a principal on the global asset allocation team at AQR. “Global equities continued their upward march and global bond yields continue to fall on the back of central bank action,” said Ooi.
As a result, AQR's fund attracted $782.4 million in the first quarter, accounting for a large chunk of the inflows into the strategy, according to Morningstar data. While returns helped, the fund also has lower expenses: The fund's institutional share class has an expense ratio of 1.25%, compared with the average 2.13% fee for the strategy. It also avoids using swap agreements, a common tactic used by managed futures funds to charge performance fees.
Salient's Mr. Partridge said the events in April could lead to a trend reversal in the euro versus the U.S. dollar. He expects U.S. stocks will continue their climb as the risk of a Fed headwind diminishes.
“It was a tougher month for trend followers in particular due to the choppiness of these positions, but we believe they remain pretty well-positioned for the rest of the year,” said Mr. Partridge.
