Systematic hedge funds, leveraging coding and algorithms to identify market trends, have significantly outperformed their peers in the first quarter, benefiting from the erratic market conditions fueled by inflation and geopolitical tensions. These funds, which pivot on systematic strategies rather than human decision-making for trade selections, have seen an average gain of nearly 9% in the first two months of 2024. This is a stark contrast to the wider hedge fund industry's gain of 2.6%, as per data from Barclays' prime brokerage.
The success of these funds is a reflection of the volatile nature of global markets and the varying fortunes across different regions and assets. For instance, while the U.S. S&P 500 index has seen an over 11% increase this year, Hong Kong's Hang Seng index has dipped by about 2%. Similarly, Japan's Nikkei index has surged over 20%, with European stocks and China's market experiencing more modest gains.
Among the commodities, cocoa has stood out with a sustained rally to record highs, benefiting systematic hedge funds. The diverse performance across regions and asset classes plays to the strengths of these funds, which thrive on market disparities. The environment has been particularly conducive for systematic managers who maintain balanced long and short positions, capitalizing on both rising and falling asset values.
In 2023, the hedge fund industry largely profited from concentrated positions in major U.S. tech stocks. However, the sharp divergence in 2024 within stocks, bonds, and commodities has created an ideal scenario for systematic strategies. Notably, aerospace and defence stocks in Europe have rallied significantly, while utilities stocks have seen a decline.
The highest-performing systematic strategies have embraced greater risk, with the top 10 trend funds allowing almost two-thirds more volatility than their peers, achieving an impressive 20% return in the early months of this year. Even funds with lower risk thresholds have seen substantial gains, thanks to strong movements in agricultural commodities, currencies, and energy.
Long positions in cocoa since the first half of 2023 have bolstered returns for many, driven by poor crop yields in major producing countries and high demand for cocoa beans. Firms like Winton Capital and Transtrend have reported significant profits from their systematic strategies, benefiting from both long and short positions across various commodities and financial instruments.
Despite the overall success, fixed income has presented challenges for systematic funds, with the unpredictability of interest rate cuts affecting performance. Nonetheless, the diverse sources of market instability, including climate phenomena, interest rate normalization, and geopolitical risks, continue to provide fertile ground for trend-driven strategies.
