Trend-Following Hedge Funds Face Volatility Challenges in August

Trend-following hedge funds faced significant losses in August due to bets on the New Zealand dollar and Japanese stocks and bonds amidst global market volatility. The sudden reversals led to double-digit declines for some funds. Hedge funds with shorter-term trades fared better, posting positive performances.

Trend-following hedge funds took a significant hit in August due to their bets on the New Zealand dollar and Japanese stocks and bonds, amid extreme global market volatility, according to Societe Generale data seen by Reuters. These funds closed the month with long positions in various asset classes including Japanese government debt, U.S. equities, and the Australian and New Zealand dollars, SocGen data showed.

Despite some assets favored by trend hedge funds proving loss-making this year, the data didn't clarify whether they held bullish or bearish positions when these losses occurred. August's most detrimental bets were on 10-year Japanese government bonds, the Nikkei 225, the New Zealand dollar, and the German and Italian stock markets, according to the SocGen note.

The market upheaval was triggered by the unwinding of massive carry trades, leading to a feedback loop of equity price drops, volatility, and subsequent hedge fund selling. While these factors caused double-digit performance declines for several trend followers, such as Eclipse Capital Management, Drury Capital, and SEB Asset Management, hedge funds focusing on shorter-term trades witnessed positive results, with firms like Revolution Capital Management and Altiq finishing August with gains.

(With inputs from agencies.)