April 18, 2018 / 1:58 PM / 6 months ago

Computer-driven hedge funds miss out as AA shares bounce

LONDON (Reuters) - Sometimes the old-fashioned methods work best and that proved true this week in the high-stakes world of hedge fund trading.

Computer-driven hedge funds lost 8 million pounds ($11.4 million) on Tuesday from their long-standing short positions in AA (AAAA.L), betting the shares would fall in value.

In contrast, many hedge funds managed by traders had already banked their profits from AA and bailed out - before a costly jump in the share price following the company’s results on Tuesday.

Hedge fund Parvus, which is AA’s third-biggest shareholder according to Thomson Reuters Eikon and not computer-driven, also made money - 11.7 million pounds from a long position.

Shares in the British roadside recovery group and insurer had fallen sharply following a profit warning in February but jumped 17.4 percent after their results.

“A credible recovery is taking shape,” said Sandy Chen, analyst at Cenkos, which has a buy rating on the stock.

In a short trade, the hedge fund borrows the stock to sell on, on the belief that it will be able to buy shares back later at a cheaper price before returning it to its original holder.

Six hedge funds had outstanding shorts in AA above 0.5 percent in AA, the level above which firms are required to disclose their holdings, the most recent filings with Britain’s Financial Conduct Authority (FCA), from April 16, showed.

Four of the six use computer-driven strategies in which they follow market patterns using algorithms.

Among them, Leda Braga’s London-based Systematica Investments lost 1.1 million pounds on Tuesday.

U.S.-based AQR Capital Management faced the biggest loss of 4.4 million pounds, having notched up a gain of 5.86 million pounds on Feb. 21.

AA shares slumped in February after the company issued a profit warning, cut its dividend and outlined a strategic review, following the dismissal of its executive chairman last year for gross misconduct.

The shares hit record lows of 70 pence in March, but have since doubled in price, rallying 23 percent since Tuesday’s results alone.

The shares were trading at 140 pence at 1315 GMT, up 4.8 percent on the day, causing further pain for those with short positions.

Traditional stock-picking hedge fund firms, including GLG Partners, Citadel and Millennium Management, all cut their short positions in March, the FCA data showed.

Spokespeople for Millennium, GLG, Systematica and WorldQuant declined to comment while Parvus, AQR and Citadel were not immediately available to comment.

($1 = 0.7042 pounds)

Reporting by Maiya Keidan; Editing by Elaine Hardcastle

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