NZ Dollar and Japan Bonds Influence Hedge Fund Returns in August, Bank Data Reveals – By Reuters

By Nell Mackenzie

LONDON – Trend-following hedge funds faced challenges in August due to their investments in the New Zealand dollar and Japanese stocks and bonds, as revealed by data from Societe Generale.

At the end of August, these funds maintained long positions in Japanese government debt, U.S. equities, and both the Australian and New Zealand dollars. However, some of these asset classes, which are typically favored by algorithm-driven trend hedge funds that capitalize on price movements, led to losses this year.

The specific nature of the positions—whether they were bullish or bearish—remains unclear for the losses incurred. According to SocGen, hedge funds experienced significant setbacks in 10-year Japanese government bonds, the New Zealand dollar, and the German and Italian stock markets.

While this year has brought challenges for currencies such as the Mexican peso, British pound, euro, and futures like blended gasoline and U.S. 2-year Treasuries, these instruments turned profitable in August.

The abrupt reversal in crowded equity and foreign exchange trades during that month was triggered by the unwinding of extensive carry trades, where investors borrowed low-yield currencies like the Japanese yen to invest in higher-yielding assets. This created a difficult cycle of declining equity prices, increased volatility, and subsequent hedge fund selling.

Despite the turmoil, the drop was temporary, with global stocks rebounding to record highs later in the month. However, many trend-following funds experienced double-digit performance declines during August. Funds from Eclipse Capital Management, Drury Capital, and SEB Asset Management reported negative returns exceeding 10%. Nevertheless, Drury Capital and SEB Asset Management were still up 3.45% and 0.57% for the year as of the end of August.

On a brighter note, hedge funds that engaged in shorter-term trading reported better performance in August. Funds from Revolution Capital Management, Altiq, and Crabel Capital Management finished the month with positive returns between 3.8% and 4.5%.

Both Altiq and SEB Asset Management declined to offer comments, while the other funds did not respond immediately.