How global macro hedge funds can capitalise on the “looming” economic normalisation
Global macro hedge funds from across the emerging market, systematic and discretionary spectrum may be well-placed to capitalise on prevailing equity valuations amid economic “normalisation”, Lyxor Asset Management strategists said this week.
While discretionary global macro funds offer a tactical bias, which appears relevant “at the trough of the business cycle”, emerging market-focused macro managers benefit from stronger credit profiles of energy and metal exporters amid rising commodity prices.
Risk assets have been setting new records in the US recently, Lyxor said in a note this week, with the S&P500 now up 13 per cent since the end of October, before the results of the Pfizer/BioNTech Covid-19 vaccine were announced.
But the vaccine roll-out, and the subsequent economic “normalisation”, is preventing investors from being too defensive, despite rich equity valuations, strategists explained.
Against this backdrop, certain alternative strategies which offer both performance and diversification would prove attractive.
“Global macro strategies can deliver on both fronts,” senior strategists Philippe Ferreira and Jean-Baptiste Berthon, and hedge fund analyst Pierre Carreyn, wrote in the market commentary.
“Global macro strategies are quite heterogeneous, from pure fixed income players to multi-asset strategies, discretionary or systematic, invested in developed or emerging markets, or both.”
Splitting the universe into EM, systematic and discretionary, Lyxor’s analysis noted that strategies normalised their equity market beta at “higher levels but in moderate proportions”, particularly for discretionary funds.
At the same time, they remain long fixed income but “often with decreased and reshuffled positioning” and remain exposed to gold amid central bank balance sheet expansion.
They also “maintain an elevated bias towards EM assets, in particular on currencies such as the CNY/CNH, MXN, RUB and INR versus USD,” the note observed.
Lyxor’s research suggests current positions from global macro funds on EM FX carry trades – a strategy which borrows low-yield currencies to invest in high-yield ones - appear to be backed by fundamental analysis, not a systematic risk premia approach.
“Carry strategies such as EM sovereign credit remain appealing as major central banks keep a lid on yields,” they added.