Niederhoffer Capital lost 1.9 percent in its flagship Diversified program which manages $534 million. However returns were up 2.9 percent in this month to June 21. After going through a losing period last year, Niederhoffer has recovered very well through the first half of this year with a +29.9 percent return.
Performance Drivers In May
Niederhoffer’s investment approach benefits from bouts of high volatility and was therefore not as affected by the sudden selloffs as others were. As government bonds yields became the major market mover in the last few weeks, Niederhoffer’s performance declined in European fixed income investments while profiting in JGBs and U.S. Treasuries. The fund was up in both its long and short strategies in fixed income assets. Throughout the year the hedge fund’s best performer has been the USD/JPY trade and the Diversified Program has taken profits overall in its currency and fixed income trades. Losses came from equities whereas commodity trades of the fund also declined across all assets.
Niederhoffer’s current view of the market is that interest rates will increase and therefore commodity prices will also rise. This dynamic has taken the fund to short rates and go long on commodities. Neiderhoffer sees this hedge to return more in the present market conditions.
Rising Rates, Doom For Trend Following
Niederhoffer repeats his conclusion that in a rising interest rates environment, sell and hold strategies will not work as buy and hold had worked successfully in falling rates markets. In the latest letter, the fund’s analysis shows that trend following strategies will also be unsuccessful. The analysis used moving average crossover and directional trends of past months to model return on US 10-Year Note, US 30-Year Bond, Eurodollar, Bund, Bobl, and 10-Year Japanese Bond futures. The Sharpe ratios with combined trend following strategies and separate models fell in the range of 0.11-0.33. Niederhoffer’s conclusion is that it would be hard to make money from fixed income assets in a rising rates environment, especially harder in cases where traditional approaches and concentrated portfolios are used.
June came as the toughest month for hedge funds and CTAs when both stocks and bonds declined at the same time. The HFRX Hedge Fund Index has declined 1.73 percent as of June 26 whereas HFRX Macro/CTA has dropped 0.69 percent to date. If stocks and fixed income assets continue to plummet at the same time, things could get messier for these investment vehicles.