After a difficult month for its European Long Short fund, TT International explained that behind the big headlines of the month, there was a more important trend of investors moving away from momentum in March that punished a lot of hedge funds. It’s responding to these trends by reducing its gross exposure, but is still confident that last month’s losses don’t discredit its overall strategy, according to a letter to investors reviewed by ValueWalk.
TT International: Rotation out of momentum a sign of ‘tired’ themes
The MSCI Europe Barra Momentum Index indicates that over much of the month, there has been a significant rotation out of those stocks with better momentum,” says the hedge fund’s March 2014 investor letter. “One way of interpreting this is that themes which have been in place for time have arguably become stale.”
In the US, TT International cites a Goldman Sachs Group Inc (NYSE:GS) measure of the 50 most important stocks impacting hedge fund portfolios and says that the move away from momentum correlates with that index’s poor March performance. Compiling such information in Europe isn’t as straightforward as collecting 13-F filings, but the hedge fund argues that a similar effect exists.
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The TT Europe Long/Short fund has kept its net exposure close to neutral, moving from around -5% to about +3%, but it has reduced gross exposure from 260% to less than 190% reflecting poor visibility in the markets. The fund says that according to its internal analysis, last month’s modest losses show that the fund will be able to withstand ‘relapses’ during periods of consolidation and that the model works even if there are regular ‘relapses’ in relative momentum stocks.
TT International: Top contributors and detractors
The TT European Long/Short fund was down 1.11% in March, though it is still up 1.65% year-to-date and 12.05% since its inception in 2010, with $54.7 million AUM invested in 64 long positions and 35 short.
The fund’s top contributors in March (returns of at least 20 basis points) included long positions on the Greek bank Piraeus Bank SA (OTCMKTS:BPIRY); Poundland Group PLC (LON:PLND), which held a successful IPO; UniCredit SpA (BIT:UCG); Peugeot SA (ADR) (OTCMKTS:PEUGY) (EPA:UG); and a short position on an unnamed UK retailer which had poor earnings and faces a major new initiative from one of its competitors.
Top detractors (losses of 20 bp or more) were long positions on Vodafone Group Plc (ADR) (NASDAQ:VOD) (LON:VOD), whose price fell after it returned cash to shareholders and restructured its balance sheet; Genel Energy PLC (LON:GENL) (OTCMKTS:GEGYF), whose price fell most likely because of profit taking; and media firm RTL Group.