Managed futures hedge funds typically cannot find success in markets that are manipulated.  AIS Capital Management, a Wilton, CT-based hedge fund known to utilize algorithmic trend following is doing something about it.

Hedge Funds

The hedge fund, which has a managed futures as well as a gold trading strategy among other offerings, filed a class action lawsuit through its Washington, DC law firm earlier this week.  According to a report in the Wall Street Journal, the class action lawsuit claims that from Jan. 1, 2004 to the present day, Barclays PLC (NYSE:BCS) (LON:BARC), Deutsche Bank AG (NYSE:DB) (ETR:DBK), HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA), The Bank of Nova Scotia (NYSE:BNS) (TSE:BNS) and Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE) “combined, conspired, and agreed with one another and unnamed co-conspirators to manipulate the prices of gold and gold derivatives contracts.”

Was fix in over in London?

The five banks that set the London gold rate, commonly known as the “London fix,” were quick to respond.  Deutsche Bank AG (NYSE:DB) (ETR:DBK) said in a statement: “We believe this suit is without merit and will vigorously defend against it.” Bank of Nova Scotia said: “We deny the claims made against Scotiabank and will defend the bank on this matter.” Barclays PLC (NYSE:BCS) (LON:BARC), Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE) and HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) declined to comment.

Hedge fund: Suit seeks $5 million in damages for all groups that invested

The lawsuit seeks compensation of nearly $5 million for all groups that invested in the $2.4 trillion gold bullion market or gold futures and derivatives since 2004, according to the report.

On February 28, ValueWalk had written an article about the potential for gold market manipulation.  The article noted that Researchers Albert Metz, managing director at Moody’s Corporation (NYSE:MCO) Investors Service, and Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, are calling for an investigation of collusive behavior.  The primary issue stems from unusual trading patterns near the close of trading in London around 3 p.m. when the fix price is set on a conference call between the biggest gold dealers.

Hedge fund: Algorithmic strategies might not operate well in manipulated markets

AIS Capital operates a handful of quantitative strategies, including a fund that runs nearly $400 million of client assets.  After generating 192% return in 2009 and 79.19% in 2010, the strategy found difficulty 2012-2013, climaxing in a 67% loss last year.

Many managed futures hedge funds and algorithmic trading strategies bases their success on detecting patterns is past performance and then developing mathematical probability formulas that determine the trading strategy going forward.  When markets are artificially manipulated, if done by the large banks or the Federal Reserve, the “natural” historic patterns upon which these signals are based become distorted.

AIS is the second plaintiff to go after the five banks for damages, according to the report. Kevin Maher, a trader, also filed a class action suit one week ago. 

The Wall Street Journal report quoted an unidentified senior executive at a gold trading platform defending the banks, saying: “Everyone is a grown-up in the market and anyone who trades at the ‘fix’ is aware of what they are getting and how it works – the thought that things are being kept secret is a misunderstanding.”  While rumors of metals market manipulation had been rife throughout commodity market participants – including a highly visible silver market manipulation investigation that was abandoned by the CFTC – there was no publicly known proof of manipulation in the markets.   

Regulator investigations

German regulator BaFin launched an investigation into gold-price manipulation and demanded documents from Deutsche Bank, according to the report. “The examinations [into gold and silver price fixing] were launched several months ago and are still ongoing,” BaFin was quoted as saying.  UK’s Financial Conduct Authority is investigating the issue, and the CFTC has had private meetings regarding the issue, according to the report.