Discretionary macro hedge funds weather economic turmoil

Performance

Many discretionary macro managers are successfully capitalising on the continuing global economic upheaval, with solid first quarter gains that may hint at a reversal of fortunes for a strategy beleaguered by assorted challenges and high-profile closures in recent years. 

Macro funds – which aim to profit from unfolding macroeconomic trends and political events by trading an array of instruments spanning currencies, rates, bonds, commodities, futures and more – have struggled to maintain consistent performance since their strong showing in the 2008 global financial crisis. 

Historically low interest rates, continued central bank stimulus and more predictable volatility patterns have made it tricky for the sector to capitalise on emerging patterns over the past decade.

Now, though, there are signs that some discretionary macro strategies are making hay in markets and economies rocked by the still-unfolding coronavirus pandemic.  Discretionary thematic macro funds gained 4.61 per cent in March, new HFRI data shows, with performance for Q1 at 3.0 per cent, while other hedge fund strategy types slipped deep into the red. 

There was considerable performance dispersion across the sector, with some well-known fixed income-focused macro funds reportedly generating record gains while others lost more than half their portfolio value, according to bfinance research.

Among the high-profile winners were Brevan Howard Asset Management's long-running macro flagship strategy, which made 23 per cent in the first quarter of 2020, powered by an eye-catching 18 per cent during March’s market mayhem. Elsewhere, Rokos Capital Management, the macro hedge fund run by Brevan founding partner Chris Rokos, added 14 per cent in March to bring its Q1 gains to more than 20 per cent. 

As early year concerns over the potential impact of the novel coronavirus gave way to full-blown fears over a global pandemic, many discretionary macro managers were able to better anticipate the response from central banks, and adjusted their portfolios accordingly. Specifically, this meant successful shorts in equities and commodities markets, and also mainly making money on US government bonds by anticipating the Federal Reserve’s rate cut.

“Already in January, there had been some discussion about the potential pandemic and so discretionary managers had some time to move the portfolio with the evolution of the new information that was coming out from specialists and epidemiologists,” says Cedric Vuignier, head of manager research & alternative investments at SYZ Asset Management.

Vuignier concedes that anticipating the unfolding macro situation remains “extremely difficult”, but suggests the recent performance firmly makes the case for a macro allocation and short-term CTA allocation as “insurance” within a broader investment portfolio. 

“For me, I will say that for the next few months I will bet more on the discretionary managers than the trend followers,” he says. Underlining his confidence, he continues: “The reason is that you still have volatility in different asset classes, and this is creating a lot of dislocation. It is those discretionary macro managers who are often quick enough to benefit from that.” 

Such sentiment suggests a decisive shift in the macro mood music compared with recent years, with the sector struck by a number of high-profile closures following meagre returns.

London-based Stone Milliner Asset Management, the discretionary global macro shop founded by a group of traders from Louis Bacon’s famed Moore Capital Management, closed down at the end of last year following disappointing performance. Moore Capital itself returned money to investors towards the end of 2019, opting to manage internal money only.
 
Earlier, Paul Brewer’s flagship fund Rubicon Global, and Hugh Hendry’s Eclectica, two funds that made their names with colossal gains during the 2008 crisis, also fell victim to macro’s misfortunes, each suffering double-digit losses before closing down in 2019 and 2017, respectively. 

Now, though, with the prospect of a potentially deep worldwide recession looming large, renewed fiscal challenges across developed and emerging markets, and further geopolitical tensions between the US and China, managers running the classic discretionary macro model have an opportunity to demonstrate their value to allocators against a rapidly shifting and uncertain economic backdrop.

“On paper, global macro strategies should be more adept at handling top-down macro driven markets than their fundamental bottom-up hedge fund peers,” strategists at bfinance said this week.  

However, they observed how the “sheer scale and speed” of market swings across multiple asset classes ultimately proved challenging for many macro funds. 

“Managers focused on commodities and currencies generally fared better than generalists. Short oil and long bond positions drove gains, while losses arose from being long equity or equity-like assets eg high yield,” they said in a research note.

Vuignier meanwhile believes that, for hedge funds, the recent upheaval offers “the best conditions to make money”, and is confident of their ability to advance amid the volatility.

“I’m more positive on macro. The outcome will be different for the economies around the world, and they will be able to play those differences, such as between emerging markets, Europe and the US. They will use either relative value or directional trades,” he notes. “It is my gut feeling that the discretionary macro managers will do well, as well as shorter-term CTAs, while choppy markets are never good for major long-term trend followers.”

HFRI data for Q1 shows that while quantitative trend-following funds suffered some USD19 billion of outflows, fundamental macro discretionary strategies attracted USD3.8 billion in investor allocations.

Expanding on the investor perspective, Vuignier observes how today’s hedge fund client base is more institutional than in 2008. 

“It’s pension funds, it’s sovereign wealth funds, insurance. Most of the money that has come to hedge funds in the last seven or eight years has come from institutional clients, not retail investors,” he explains.

“They are not short-term; they are less emotional than the clients we had in 2008. So it’s easier for us to talk to them, to show them that there is an opportunity today, and the hedge fund industry is more stable now.

“There will be some who will close, or who blow up – that’s normal, that’s part of the business. But in terms of structure, the hedge fund industry is solid and now they really put money to work, which was more difficult in 2008. Institutional investors understand the market, and understand the strategies.”