Systematic global macro strategies have become a more popular feature in recent years as quant managers leverage improved technology and modelling tools to generate uncorrelated returns. Anoosh Lachin and Asif Noor, co-portfolio managers of Aspect Capital’s Systematic Global Macro programme talk to Hedgeweek about the current market environment and why 2018 proved to be a smash to the boundaries for the programme.
A recent study by Barclays Capital found that systematic macro strategies attracted USD19 billion of net inflows between 2016 and 2018, while in comparison, discretionary macro strategies registered net outflows of USD30 billion. The findings are just one small snapshot into how investors have thought about global macro strategies but they reinforce the fact that quantitative funds, which run sophisticated models and trade on signals without requiring human input, have become more popular and easier to understand.
In today’s marketplace, discretionary managers find themselves competing with armies of sophisticated algorithms seeking out the best ways to capture ephemeral alpha. Quant funds deploy a range of techniques including risk filters, natural language processing algorithms that scrape key words from data sets (both traditional and alternative) and innovative trading models to build systems that learn to think for themselves based on pre-defined parameters.
The discretionary manager is still effective but the way in which they run a portfolio comes with more idiosyncratic risk than a computer model. Our behavioural biases can be both a help and a hindrance when trading. Going on one’s hunch that the sterling will fall precipitously upon the UK’s succession to join the European Exchange Rate Mechanism in 1990, which led to George Soros making an estimated USD1 billion, can be a game changer. But as electronic trading increases, trying to compete in liquid markets with a quant fund strategy is getting harder and harder.
Indeed, the likes of Paul Tudor Jones have come to embrace quant investing by hiring teams of quantitative analysts, spawning a new portmanteau; the “quantamental” strategy. Tudor Jones’s trading philosophy today is: “No man is better than a machine, and no machine is better than a man with a machine.”
At Aspect Capital, Anoosh Lachin and Asif Noor are co-portfolio managers of the Systematic Global Macro programme. The Programme has a systematic relative value approach to global fixed income, global stock indices, currency and volatility investing.
Theirs is just one of a huge array of systematic global macro strategies.
“Investors are concerned with exogenous events in the world so how can a systematic investment process cope with trade wars, central bank interventions, Brexit and so on?” asks Lachin rhetorically, from Aspect Capital’s London office.
“Surely a discretionary trader would be better placed to get a feel for the market? But that’s not necessarily the case. There are periods in history, like the global financial crash a decade ago when central banks intervened, when discretionary managers performed terribly.”
Historically it used to be that approximately three quarters of global macro managers were discretionary and one quarter were systematic but that ratio has increased towards systematic managers over the last few years, observes Noor.
“There are still more discretionary managers than systematic managers, so they are getting more of the AUM from investors,” says Noor.
“However, I think what’s changed (and why systematic strategies have been more popular) are technology advances in terms of alternative data sets, AI, machine learning techniques…systematic managers are better suited to take advantage of these things, although there are discretionary managers using quant methods in their investment process.
“We are all using more technology than before, fintech has become more mainstream. Investors have less aversion to algorithms and are perhaps more open to quant programmes.”
Both discretionary and systematic macro strategies did well last year, especially in Q4 2018.
In December, the HFRI Macro: Systematic Diversified CTA Index gained +1.35 per cent and the HFRI Macro Index (Asset Weighted) Index gained +1.38 per cent while the S&P 500 fell -13.5 per cent.
“More importantly looking into 2019 with uncertain prospects for Brexit and the continuum of possibilities as it pertains to the Sterling/Euro, Swiss Franc, USD or JPY, Macro Discretionary could possibly be the most likely strategy to be positioned for significant dislocations which may occur,” suggests Kenneth J Heinz, President of Hedge Fund Research, Inc.
He says that recent macro flow trends have favoured systematic strategies “as investor appetite for quantitative strategies overall (including risk premia & risk parity) has grown”.
Market volatility and correlation between asset classes are two important factors that determine how well a systematic macro strategy might do. This is especially true of an RV strategy like Aspect Capital’s. If asset classes all move in the same direction, it’s impossible to make or to lose money; long positions will make money, short positions will lose money and everything will be perfectly balanced.
“Generally, when correlations are low and asset dispersion is higher, we find more opportunities,” says Lachin. “If your strategy is systematic RV you do need assets within sectors moving in different directions, whereas if you are directional, this is less important.
“Last year, we did see a distinct correlation breakdown and volatility picked up. In the first quarter of 2019, volatility fell back to 2016 levels.”
Three months, in particular, helped the Systematic Global Macro programme deliver returns last year: namely February, October and December, each one being a period of market dislocation.
Noor says that the speed of the trading programme has increased quite a bit, allowing it to time markets more than it did previously, picking when to go in and out of trades in a more non-linear fashion. There are approximately 30 different trading models in the programme. Some are longer-term, slower moving models, designed to benefit from a lower vol, lower risk regime – these are more linear models.
“On average, the programme trades positions for 20 to 25 days,” says Noor, “but specific events might mean we close positions within a day.
“We have successfully implemented three new models already this year which is unusual for us. Normally over the course of a year we might only implement one or two.”
The programme trades futures in 40 of the deepest, most liquid global markets. It does not trade single name stocks or CDS, nor does it trade commodities.
Last year, the programme did well in the fixed income and FX space.
“The majority of alpha came from those two asset classes,” adds Noor. “In February, we were up strongly in FX and benefited from the non-linearity referred to earlier. With respect to FX, the risk filters we applied had a significantly positive effect. We did well tactically moving in and out of positions and it helped to bypass a lot of the problems in the FX markets during that month.”
Broadly speaking, the programme uses three risk filters in each of its 30 trading models. Each model has its own views on an asset class. These are then grouped together into asset class portfolios and then into a final, aggregate portfolio.
Within a trading model there will be some intelligence programmed in based on pre-defined parameters, which turn signals on or off depending on the market regime. For example, one model might turn the signal off to trade Italian bonds, while other bond models leave the signal on to trade Italian bonds.
This risk filter is known as ‘regime conditioning’, where a model is aware of the regime it is trading in and can switch in and out of positions.
“We have two other risk filters. These operate at the aggregate portfolio level, where the whole model could be switched on or off, not just asset class-level models. These two filters apply to more crowded positions, which we are trading in a more active, more tactical way, if the market is conducive.
“It was the overall effect of these three filters that allowed for such a strong performance in the FX book alone, in February last year. Moreover, it proved that the programme could perform well in tough market conditions: February, October and December were the strongest months when a lot of other managers got hurt.
“Everything worked the way it was meant to last year. It was like standing at the wicket, consistently hitting the ball to the boundary,” remarks Noor.
Discretionary managers are well positioned to capitalise on macro situations like Brexit or US trade wars. They have more degrees of freedom to change their mind on the back of news breakouts, and position their portfolios accordingly. By contrast, systematic macro managers rely on historical data sets and aren’t designed to react to things on the fly, as it were.
“Given the binomial, black and white nature of geopolitical risks, particularly those associated with Brexit, the opportunity for Macro and particularly Discretionary Macro, is high and I believe investors are correctly perceiving, anticipating and positioning for this,” suggests Heinz.
Indeed, Barclays Capital’s study found that investors are most likely to favour discretionary macro strategies in 2019 as the most important diversifier for their portfolios.
Systematic funds might be popular but discretionary absolutely still has a role to play; this is far from suggesting the machines will take over.
Looking at the global macro picture in 2019, “If there were a US/China currency war, it would be an uneven one,” Lukas Daalder, Chief Investment Strategist at BlackRock (Amsterdam) told Hedgeweek last month.
He thinks the risk to US 10-year Treasury yields widening out are somewhat limited, especially given the equity market volatility in December 2018. This has caused bond yields to fall from 3.2 per cent to 2.6 per cent.
“The risk to bond yields rising seems to be somewhat limited in my view. Much will depend on what happens with inflation and the US labour market. If inflation starts to pick up (and there is no sign of that happening yet), then bond yields will probably rise. Otherwise US Treasuries offer value at current yield levels,” says Daalder.
When asked to rationalise why investors should consider systematic global macro strategies alongside discretionary programmes, Lachin thinks that one key benefit comes down to the level of transparency:
“We can explain at the position level, to the basis point, why we are holding a particular futures contract, which for a qualitative manager is harder to do. That level of transparency, reporting and openness really helps quantitative investment processes like ours.
“And the research we do is really exciting. We have a very eclectic range of models, which is quite unusual across our peer group.”
“Investors are worrying about equity and bond markets being toppish. They want to find uncorrelated sources of alpha. We are very additive to investors’ portfolios. The diversifying characteristics of our programme and the market environment makes it an interesting strategy for different investors,” concludes Noor.
