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Miton hits the ejector button

MitonOptimal says it has concerns about blackbox investment strategies and sold out of the JP Morgan Highbridge statistical market-neutral fund just before it fell by almost 7 per cent in less than a week.

Multi-manager MitonOptimal was holding the fund in its multi-asset Arcturus fund but says it sold out as it felt that the fund’s computer-driven model was not behaving as it expected.

The management of the JPM Highbridge fund is outsourced to Highbridge. It is a market-neutral fund which is designed to make money in rising or falling stockmarkets by buying stocks that its computer model identifies as cheap and selling short those that it identifies as expensive.

Miton believes this model was thrown off course when problems occurred in the credit markets as a result of defaults in the US sub-prime mortgage market, which also had an impact on equities.

According to MitonOptimal, the model could not cope with human emotion, which resulted in investors panic-selling quality stocks because they were most liquid while being unable to sell their unwanted stocks at the right price.

MitonOptimal says it has turned market conditions to its advantage by buying another hedge fund, Durham international.

This is a distressed debt fund that aims to make profits by shorting the bonds of companies that the hedge fund manager thinks will run into trouble.

MitonOptimal fund manager Tom McGrath says: “When there are problems in credit markets, Durham International should have a field day. It looks to make money if companies go bust, struggle or default on debt.

“Its manager was saying it could make 10 to12 per cent a year if there is not much of a problem and 30 to 40 per cent if there is a problem in credit markets.”

Highbridge declined to comment.

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