By Nell Mackenzie
LONDON (Reuters) - Former Odey Asset Management (OAM) portfolio manager James Hanbury has said in a letter to investors that passive and systematic trading strategies have grown so much that those trading on company fundamentals might be hurt.
The Lancaster Absolute Return Fund, which Hanbury runs with ex-Odey colleague Jamie Grimston, returned 2.9% for the month of March and was up 1.4% for the year to March 31, said the letter seen by Reuters on Thursday.
The Lancaster Absolute Return Fund oversees 646 million pounds ($813 million) in investments.
In the letter, Hanbury said stock market trading had become more volatile after company earnings or announcements. He attributed this to the growth of passive investing.
Passive funds typically track the performance of a particular market or index and are programmed to run automatically, rather than being managed by someone making investment decisions.
As these systematic and passive strategies have grown bigger proportionately to others, they have increasingly affected stock prices, the letter said.
Investors operating outside these big trading programs and trading on a company's outlook were essentially 'buying blind', Hanbury said.
"Most investors buying a passive fund have no idea they are on a momentum trade and clearly they are adding to the weight of money that does not understand what it owns," he said.
The Lancaster Absolute Return Fund made money on long positions in large banks such as Barclays (LON:BARC), NatWest (LON:NWG) and Deutsche Bank (ETR:DBKGn), the letter said.
All of these companies did not immediately respond to a request for comment except for Deutsche Bank, which declined to comment.
Short positions on private equity cost the hedge fund performance but Hanbury remains committed to the trade.
A short position bets an asset will fall in value.
Hanbury moved to Lancaster Investment Management in July.
($1 = 0.8226 pounds)