Hedge funds lose on UK election shock, but man less than machines

Fri Apr 21, 2017 6:28am EDT
 
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By Maiya Keidan and Jemima Kelly

LONDON (Reuters) - Hedge funds lost out on Tuesday after British Prime Minister Theresa May shocked markets by calling a snap election, but those led by humans outsmarted those led by machines, in a reversal of fortunes from the Brexit referendum.

While computer-driven hedge funds garnered plaudits for their outperformance in the wake of Britain's shock vote to leave the European Union last year, this year's first major test resulted in big losses.

Among the most high-profile losers was Connecticut-based investment firm AQR Capital Management's $13.3 billion computer-driven Managed Futures Strategy, which lost 1.1 percent on Tuesday, according to an investor who was told by the hedge fund, representing a loss of more than $130 million.

The same strategy made 5.2 percent on the day the results of Britain's EU referendum were revealed in June.

"The announcement of the general election was a turnaround for markets, leading to a trend reversal across UK assets, which hurts computer-driven hedge funds most," said Philippe Ferreira, head of hedge funds research at Lyxor Asset Management.

Most of the hedge fund strategies run by machines that lost out from these moves did so because their algorithms simply follow market momentum. A break in the trends that those algorithms have spotted, therefore, tends to hurt them.

Tuesday's surprise announcement sent sterling soaring to a six-month high above $1.29 with the currency jumping above its 200-day moving average and breaking the trading range of between $1.20 and $1.28 that had been in place since early October.

And Britain's FTSE 100 stock index, which tends to move inversely to the pound, suffered its heftiest falls since the days following the Brexit vote, having hit record highs just last month.   Continued...

 
FILE PHOTO: A Union Flag flies in front of the Big Ben clock face abover the Houses of Parliament in central London, Britain April 18, 2017.  REUTERS/Toby Melville/File Photo