Systems Down For JWH And DUNN, Niederhoffer Countertrends Ahead of Crowd

Sep 20 2007 | 8:12am ET

August returns for hedge funds and commodity trading advisors alike were not pretty, to say the least. But while a pair of Florida-based trend-following heavyweights wilted—in terms of both returns and assets—last month, a notable New York-based countertrend trader showed hedgies and CTAs just what it means to be uncorrelated.

Roy Niederhoffer’s contrarian trading strategies soaked in August’s volatility and profited from trades in the fixed income, equities and commodities markets but lost money in currencies. Niederhoffer’s Diversified program, Negative Correlation Fund and Trendhedge Fund returned 4.15%, 1.10% and 4.81%, respectively, bringing their year-to-date returns to 11.37%, 5.89% and -2.23%. The three products manage a combine $402.1 million in total assets.

“August appears to have been one of the worst months ever for the hedge fund industry, and almost all investment styles performed poorly,” noted Niederhoffer, in his investor letter. “Unlike most of the industry, which recorded large losses in the first two weeks of the month and then recovered somewhat by month-end, our profits were generated during the first two weeks of August when volatility peaked.”

Niederhoffer added that his products’ strong performances “demonstrates the effectiveness of our strategy as a source of portfolio diversification in difficult periods for hedge funds (even other quant funds) and CTAs.”

Meanwhile, John W. Henry & Co’s programs were down again last month—most notably the International Foreign Exchange program, which fell 16.09%—and are down anywhere from 8.46% to 28.69% year-to-date. JWH’s Financials & Metals Portfolio remained the lone bright spot for the firm last month, returning 2.98%. 

“JWH’s programs were negatively impacted in the month of August as the crisis that began in the sub-prime mortgage market continued spreading globally, undermining demand for corporate bonds, equities and commercial paper,” scribed Chief Operating Officer Kenneth Webster in his August letter to investors. “The spread of the U.S. contagion produced short-lived, sharp and unusually well correlated spikes in volatility throughout global financial markets. As a result, the firm’s long-term diversified trend-following programs suffered losses as the market dislocations forced the exiting of positions in global currency and energy markets.”

Still, the firm’s total assets under management dropped a further $84 million to $437 million last month.

Fellow Floridian DUNN Capital Management fared no better. The firm’s World Monetary Assets program, which trades a mixed basket of metals, currencies, energies and stock indices, lost 22.81% last month bringing its year-to-date losses to 22.11%. The program, which posted assets under management of $504.4 million in January, has shed a staggering $461 million since the beginning of the year.

“A single institutional investor accounted for the vast majority of the large withdrawal from the WMA program in May 2007,” DUNN told FINalternatives. “DUNN's disappointing performance during July and August was chiefly due to adverse market moves and high volatility during the last half of July and the first half of August. Because of the dynamic nature of our trading strategies, our programs will adjust to these and other changing conditions continually. DUNN has not received any significant redemption requests for the end of September.”

The firm added that is actively working to raise new capital for WMA and other managed futures trading programs. “We also have several new systems in development, both internally and in conjunction with strategic partners.”

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