As the H1 inflation surge pushes central banks to hike interest rates, seismic shifts in bonds, commodities and currencies brought stellar returns for some.
As the H1 inflation surge pushes central banks to hike interest rates, seismic shifts in bonds, commodities and currencies brought stellar returns for some.
As the US Federal Reserve raised interest rates in a move to stem runaway inflation – which neared a 40-year high at 2022’s midway point – macro managers, who bet on broader economic and geopolitical events using equities, currencies, commodities, futures and more, ended the first half of 2022 in positive territory, capitalising on the H1 regime shift which has also been underpinned by rising energy costs as a result of the Ukraine war.
Similarly, CTAs and trend-following strategies, which typically utilise computer-based models to trade on directional signals and themes across a range of assets and markets, have also outperformed the broader hedge fund industry during 2022, locking onto a range of strong trends, namely the strengthening dollar, rising commodities and falling equity and bond markets.
Société Générale’s main CTA index – a key industry barometer which tracks the daily performance of 20 of the largest managed futures hedge funds’ returns – advanced more than 21% in H1 (see Fig. 3.4), its best start to the year since the benchmark launched in 2000.
Reflecting on their first half successes, some 44% of macro and managed futures hedge funds say their H1 gains have outperformed expectations, according to Hedgeweek research, with a further 37.5% saying that returns are in line with targets. By comparison, only 12.5% of macro and managed futures funds surveyed said first-half returns were below expectations.
Hedge fund managers of various strategies and stripes have had to contend with “outstanding and extraordinary” market moves against the backdrop of the Ukraine war and the end of quantitative easing, industry participants note. These moves include oil markets rocketing 100%, gold falling by around 13% from its March high, the S&P 500 losing 20 per cent, and the dollar up 9%. At the same time, the first half of the year saw the 60/40 S&P Bloomberg Equity/Bond Index fall 16.1%; by comparison, in the midst of the Global Financial Crisis, the benchmark was down only 6.7% in the first half of 2008.
“That gives you a sense of how truly extraordinary the end result of money-printing and balance sheet expansion, then further exacerbated by the invasion of Ukraine, has been,” says David Gorton, founder of systematic managed futures manager DG Partners.
“Like a lot of people, we have been expecting a rise in inflation in response to this constant balance sheet expansion and yield curve control. It’s probably taken longer than a lot of macro managers would have anticipated. But, this year, it has hit with a vengeance – you have high CPIs everywhere, whether it’s 8.5% in the US, 8% in Europe, and similar in the UK (see Fig. 3.3). We also now even have inflation of 3-4% in Switzerland.”
Industry pros also point to the “incredibly poor” performance in bond markets, which has dented financial asset prices, with credit spreads widening and equity markets falling. But that has also offered powerful trends for many managed futures models, with CTAs’ ability to stay on track and rapidly adapt to new regimes proving to be a resilient inflation hedge.
‘Criticisms’
“For the CTA sector, this year has been good,” Gorton says. “One of the criticisms that was often levelled at CTAs was that for so long they were really just long-biased towards bonds. But this year has answered a lot of those criticisms.”
With bond markets enduring the “most pronounced bear market in history” during H1, trend-following funds have generated sizable returns in the asset class. “For us in particular, broadly half our risk has been in a model that is not preconditioned by prior price action – it purely trades consensus. That has allowed us to be more short, more quickly,” Gorton explains.
“In the first half we have had significant moves in all three areas – higher rates, lower equity prices, and a stronger dollar – and as a result most CTAs and trend-following strategies have delivered strong performances.”
“Diversifiers, CTAs and managed futures are generally performing well – trend followers so far this year have been working really well across most areas,” says Jason Josephiac, senior vice president, Meketa.
“We try not to have any bias – it’s more about the rate of change of inflation to either the upside or downside in an inflationary environment or deflationary environment, as well as growth, whether growth is increasing at an accelerating rate, or decreasing at an accelerating rate. And that’s why we build our hedge fund programmes with risk mitigating strategies which can capitalise on regime shifts across multiple different types of macro environments and drivers of risk.”
This shifting macroeconomic and geopolitical landscape has also formed the basis for successful trades further afield in certain hedge fund strategies.
Polina Kurdyavko, head of emerging markets at BlueBay Asset Management, and senior portfolio manager of BlueBay’s Emerging Market Credit Alpha Fund, says macro hedges – specifically a short view on US rates – proved beneficial for the strategy, along with idiosyncratic shorts on Honduras, Pakistan, Egypt and Turkey, and an avoidance of assets vulnerable to the Ukraine war.
Opportunities
“We hedged the portfolio against broader credit risks through CDS indices such as CDX EM and CDX HY which added value,” Kurdyavko says. “The portfolio benefitted from a net short Russia position both through credit and FX hedges as well as sovereign and corporate shorts. We also had CDS hedges in Ukraine which helped to protect the portfolio.”
Kurdyavko also points to opportunities in Argentina, where political volatility has cast doubt on the economic backdrop, leaving bonds trading in the low 20s. “Here, our view is that the recovery value of the bonds is likely to be considerably higher.”
Looking ahead more broadly, macro-focused hedge funds and trend-following managers are overwhelmingly confident on their second-half outlook amid the new investment backdrop. Data shows that 50% of managers running macro or managed futures strategies surveyed by Hedgeweek are somewhat positive’ on their H2 performance prospects, while an additional 44% are ‘very positive’.
“It’s been a treacherous market – the 60/40 is down 16% for the first half, and that would be the third worst year out of the past 100 I believe. So hedge funds are doing quite well in this environment, relatively speaking,” Dave McMillan, CIO, hedge funds, at Mercer, observes of the prevailing investment backdrop.
“Leading the way is macro and managed futures, as trend following strategies have produced very strong returns, as well as credit and event driven. Those managers by-and-large have done really well to preserve capital or generate gains. Anything in the low single digits year-to-date, plus or minus is very accretive when stocks and bonds are down in high double digits. Long/short equities have been the most challenged.”
Peter Kisler, portfolio manager at Trium Capital, adds: “If you look at sentiment towards global macro, it’s improved from a few years ago when equities were doing well and global macro was being somewhat ignored.
“Now that equities are doing poorly, investors are looking for strategies that can make you money quickly, that can make you money in an environment where, like this year, most asset classes have fallen. So there’s definitely more interest there.
“CTAs have had a very good year for the most part. Any reversal of these trends would cause them to perhaps underperform. Strategies like emerging markets have had a pretty poor year. We see value there, so we’d probably expect some sort of outperformance, if not in the next month or two, then later down the line.”
