| Michael Platt, BlueCrest Capital Management (Bloomberg) |
Investors in BlueCrest Capital Management’s computer-driven BlueTrend hedge fund weren’t the only ones who were relieved when it surged 6.32 percent in May, putting it up by 3.34 percent for the year-to-date. Investors in BlueCrest’s AllBlue fund were also no doubt satisfied. That fund, a so-called self-invested fund of funds because it invests in six of BlueCrest’s own hedge funds, rose 1.45 percent, boosting its gains for the year to 3.66 percent. AllBlue, which has posted 8.9 percent annualized gains since its inception in 2006, has lagged its historical return for each of the past four years, held back in part by the $14.4 billion BlueTrend fund and the firm’s other systematic fund, BlueMatrix, according to a BlueCrest report obtained by Alpha. BlueTrend has dragged AllBlue’s performance down to the point where investors would have been better off investing a la carte in the firm’s stand-alone funds over that period — as long as they skipped BlueTrend, that is.
BlueCrest Capital is the world’s fifth largest hedge fund firm, managing $32.6 billion, according to Alpha’s latest Hedge Fund 100 ranking. This is down from $35.3 billion the previous year, when it ranked fourth. The London-based firm was founded in 2000 by Michael Platt and William Reeves, two former J.P. Morgan swaps traders. In 2011 Man Group sold its roughly 25 percent stake in BlueCrest to the firm’s partners for $633 million. The partners also bought out Reeves’ stake at the same time, as he had retired.
AllBlue has only lost money once in the past nine months, dropping slightly less than 0.20 percent in January. However, the biggest culprit was BlueTrend, a systematic trend follower that fell more than 4 percent that month, when virtually all of the markets it invests in lost money. BlueTrend invests in bonds, foreign exchange, various commodities, rates and equity indices.
Trend-following funds and other systematic trading strategies have lost money for the past four years. BlueTrend avoided losses for much of that time, only suffering its first losing year in 2013. But it was a doozy, with the fund losing 11.38 percent. The fund was flat in 2012 and gained 0.32 percent in 2011.
BlueTrend accounted for 15 percent of AllBlue’s assets at the beginning of the year. As a result, AllBlue cut its exposure to BlueTrend in January by 2.5 percent, to 12.5 percent. It now accounts for 10 percent of AllBlue’s assets following another 2.5 percent cut in March.
BlueMatrix, BlueCrest’s other systematic fund, surged 12.57 percent last year, which easily exceeded AllBlue’s gains but only slightly offset BlueTrend’s loss. BlueMatrix, which accounted for 21 percent of AllBlue’s assets as of May 1, posted low single-digit losses in each of the two previous years.
BlueTrend invests in highly liquid instruments across all major global markets, according to BlueCrest. BlueMatrix invests on a market-neutral basis using fundamental and technical investing principles.
AllBlue’s largest allocation is to the BlueCrest Multi Strategy Credit fund, which invests in corporate bonds and credit and accounts for 25 percent of AllBlue’s assets. BlueCrest Capital International invests in government bonds and interest rates and accounts for 21 percent of its assets. BlueCrest Emerging Markets makes up 14 percent of AllBlue’s assets, while BlueCrest Mercantile, which invests in trade finance and loans, makes up 9 percent.
Otherwise, most of BlueCrest’s funds have been contributing to AllBlue’s performance. In January, four of the six funds made money, the losers being BlueTrend and Emerging Markets. All six were positive in February. In March, when four of the six underlying strategies rose, once again BlueTrend was one of the two detractors to performance. And in April, five of the six strategies posted gains, with only BlueMatrix losing money.
A similar pattern played out in 2013. In fact, while BlueCrest’s other funds have not exactly been outsize performers in general over the last couple of years, they still for the most part have performed better than AllBlue.
For example, BlueCrest Multi Strategy Credit rose 7.25 percent last year, the same performance as in 2011, while in 2012 it was up 9 percent. BlueCrest Emerging Markets gained 4.62 percent last year and nearly 11 percent in 2012. BlueCrest Capital International, a more mediocre performer, lost about 1.6 percent last year after gaining roughly 5.8 percent in 2012 and more than 6 percent in 2012. By contrast, AllBlue rose just 1.5 percent in 2013, 6 percent the previous year and 2.3 percent in 2011.
The lesson here: For funds of funds that invest across many hedge fund firms, performance is often mediocre, as the top-performing underlying funds tend to be offset by the worst performers. That’s apparently true of self-invested funds of funds as well.
