Hedge funds face heavy losses and scrutiny as market upheaval drives banks out of business

According to sources and preliminary data examined by Reuters, the market upheaval in March has driven many macro and trend-following hedge funds to limit their losses on failed portfolio bets and at least one bank that lends to them to carefully examine its clients' exposure.

Two small U.S. banks and the Swiss lender Credit Suisse abruptly went out of business this month, shaking the stock, bond, and currency markets and leaving many hedge funds with unanticipated losses.

Until March 29, macro and trend-following hedge funds fell 3.2%, while algorithmic commodity trading advisor funds (CTAs) fell 6.8%. Through March 29, these funds had lost 2.7% and 6% of their value, respectively.

According to sources and bank data, macroeconomically oriented hedge funds strategies like those employed by Rokos, DG Partners, and EDL Capital Fund performed poorly in March.

Based on HSBC Research, DG Partners lost 8.1% this month through March 28 while EDL Capital lost 6.4%. EDL stated that it had recovered its March losses and was in the black for the year, but it provided no further information. DG Partners opted not to respond.

EDL Capital's founder and owner, Edouard de Langlade, stated in a letter last week that he thought the rate change was the result of CTAs unwinding positions for risk-control reasons.

Market losses caused London-based Rokos Capital Management's annual decline to reach 12% as of March 24. Rokos declined to comment, but announced to investors last week that it had opted to reduce risk following the hit.

Hedge funds that track trends and trade according to pre-programmed strategies also reported significant losses. According to HSBC, funds owned by Progressive Capital Partners, Systematica, and Man Group (EMG.L) reported losses in March of 19.8%, 13.1%, and 7.6%, respectively. Man Group and Systematica declined to comment.

Progressive claimed that the rapid changes in interest-rate markets were to blame for the losses suffered by its Tulip Trend fund. It claimed that the fund saw a 29% gain in 2022.

Many funds were caught off guard in short positions in the markets for sovereign debt, according to Jim Neumann, chief investment officer at alternatives advice firm Sussex Partners. Bond yields decreased at a rate not seen since the 2008 financial crisis as a result of investors running for protection in bonds after the collapse of banks.

According to Neumann, "the severe swings in the global rates markets took their toll on many discretionary and systematic (CTAs) managers." He also noted that during the selloff, portfolio managers reduced risk exposure by an average of 50%.

CTAs reduced their total long exposure in stocks, or about $60 billion, in just two weeks. They are also reducing their exposure to credit risk. According to a prime broker at a major bank, funds exited multiple contracts, including hedges that fell short of protecting investors from market volatility.

The bank chose not to alter the borrowing limitations for its customers, but according to the broker, it has tightened its scrutiny of new customers' exposure to hedge funds.

A pension fund director who participates in hedge funds claimed that trend-following funds tend to exit bets rapidly when they fail. He believes trend-following tactics will be effective throughout the course of the year, thus he has no plans to cut back on his investment in trend funds.