GSA Capital has shifted some of its low-cost Trend Fund into products that trade off exchanges, a more opaque area of financial markets where hedge fund rivals have typically commanded much higher fees.
The Mayfair-based firm, one of London’s biggest computer-driven hedge funds, shook up the quantitative trading sector when it launched its $1.7bn Trend Fund in 2013 with a 0.5 per cent flat fee — a challenge to the industry norm at the time of charging 2 per cent management fees and 20 per cent of returns.
Now, it is pulling some of the Trend Fund away from conventional markets like currencies, bonds and equities, and is dabbling in interest rate swaps, said a person familiar with its strategy. It is also considering trading interest rate swaps in emerging markets, this person said. If successful, this strategy could force rivals to cut fees again. GSA declined to comment.
About one-quarter of GSA’s Trend Fund assets are now in alternative markets, around half of which is in interest rate swaps, while the fund has been trading some emerging market currencies for some time. The firm may also launch a separate fund focused on alternative markets in the future, said the person familiar with its plans.
As fees have fallen and returns from trend-following in major markets have waned, some quantitative firms have expanded into more niche or harder-to-access alternative markets, where they can charge higher fees.
These markets can include assets as diverse as German power, over-the-counter derivatives, cheese, sunflower seeds and cryptocurrencies — markets where added complexity may offer greater moneymaking opportunities.
Leda Braga’s Systematica Investments, Man Group’s AHL unit and Aspect Capital all run funds trading such alternative markets. Several years ago Doug Greenig, a former chief risk officer at AHL, also overhauled his hedge fund, Florin Court Capital, which had been trading mainstream markets, to focus solely on niche markets.
The low-fee approach by GSA, which was set up in 2005 through the spinout of the global statistical arbitrage desk from Deutsche Bank, may not work. Some industry insiders argue that the cost and complexity of trading and pricing some of these assets will make it challenging and require a higher fee.
The move also comes as alternative markets, which have yielded strong returns in recent years but which tend to be tougher to trade in, suffer during the coronavirus crisis.
AHL Evolution is down 1 per cent this year, having made more than 15 per cent last year, while Systematica’s Alternative Markets fund has lost 8.5 per cent, having gained about 27 per cent last year, according to figures sent to investors. However Gresham Investment Management’s Alternative Commodity Absolute Return fund is up about 8 per cent, helped by bets against some commodities earlier this year.
AHL’s $3.8bn Evolution fund, for instance, which trades alternative markets, has been charging clients a 2 per cent management fee and 20 per cent performance fee. That is in contrast to the wider hedge fund industry, where fees have been under pressure for years and where average management fees now stand at 1.37 per cent and performance fees are 16.37 per cent, according to data group HFR, the lowest levels on record.
GSA, which manages about $4bn in assets, grew its Trend Fund to more than $5bn at its peak, although like many trend-followers its performance has suffered and it has posted losses in recent years.