October 18, 2012 / 5:21 PM / 8 years ago

Exclusive: BlueCrest overhauls $620 million "black box" hedge fund

LONDON (Reuters) - BlueCrest Capital, one of the world’s biggest hedge fund firms, has overhauled the way it trades in one of its computer funds, a source said, sending a powerful signal that some ‘black box’ programs controlling billions of assets may be broken.

BlueCrest, which manages $33 billion, has designed five new programs from scratch for its BlueMatrix fund, said the source familiar with the matter, after poor returns.

The aim is to better play markets that have recently delivered losses to many hedge funds that use computer algorithms to automatically trade assets - a sector that has flourished in the last five years but whose fortunes have waned.

BlueMatrix is run by Brazilian-born Leda Braga, head of the firm’s $16 billion BlueTrend fund, which made 43 percent in 2008 during the depths of the credit crisis.

The new programs include one that can automatically read companies’ financial statements and then trade. Another makes its bets based on analysts’ best stock recommendations.

Computer traders, in one form or another, dominate trading in many global financial markets.

So-called managed futures funds, which latch onto market trends, ran $188 billion at the end of last year and trade across hundreds of markets. High-frequency trading firms account for perhaps 60 percent of total U.S. market volumes.

However, despite spending tens of millions of dollars hiring scientists to write their top-secret computer programs, many are struggling.

Man Group (EMG.L), for instance, has been changing the programs in its $16.3 billion AHL fund, which fell 6.4 percent last year and is down again this year.

In August it said it had built a new model to cap exposure to bond futures for fear of big losses should the market reverse abruptly.

BlueMatrix was $560 million in size prior to the changes but, after being presented to investors at the start of this month, has raised more money, taking it to $620 million, the source said.

BlueCrest declined to comment.

As well as looking at companies’ financial statements and analyst recommendations, BlueMatrix now also comprises a program that trades based on analysts’ earnings revisions, one that looks at stocks’ price-to-earnings ratios and one that uses trading signals from Braga’s BlueTrend fund.

The old model in BlueMatrix - a program trading at ultra-fast speeds to bet that stocks that had moved out of line with other stocks would fall back into line - has been left in the new system.

BlueMatrix is one of the funds in which BlueCrest’s AllBlue BABS.L has a holding. AllBlue said in August that BlueMatrix was responsible for a 1.16 percent loss for its portfolio during the first half of 2012.

“High levels of single stock correlations continued to present a challenging environment for statistical arbitrage strategies,” AllBlue said in an investment update at the time.

Guernsey-headquartered BlueCrest was set up in 2000 and houses the bulk of its traders in London and Geneva.

Editing by Robin Pomeroy

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