| Paul Tudor Jones II (Bloomberg) |
Last year was another tough one for macro hedge funds in general, but many of the biggest and most famous macro names posted very strong gains in 2013. According to industry tracker eVestment, the average macro fund was only slightly positive; funds below $1 billion rose just 0.6 percent, while the bigger ones climbed a mediocre 4.7 percent. By contrast, Robert Citrone’s Norwalk, Connecticut–based Discovery Global Macro Fund jumped nearly 27 percent last year, Andrew Law’s New York–based Caxton Global Investment rose 18.6 percent, Louis Bacon’s New York–based Moore Global Investments rose 17.03 percent, and Paul Tudor Jones II’s Greenwich, Connecticut–based Tudor BVI climbed 14.28 percent.
“It was a good year for the bigger macro managers who have been at this game for a long time,” says Ernest (Trip) Kuehne III, founder and senior managing partner of Dallas-based fund-of-funds firm Double Eagle Capital Management and a big proponent of macro strategies for several years.
Not all of the big names fared well last year, however: Alan Howard’s London-based Brevan Howard fund posted a mere 2.61 percent gain, while Patrick McMahon’s New York–based MKP Opportunity fund rose just 7.09 percent. Two of Raymond Dalio’s Westport, Connecticut–based Bridgewater funds posted modest gains — Pure Alpha (12% volatility) rose 3.5 percent, while Pure Alpha (18% volatility) rose 5.25 percent — but his All Weather 12% Strategy fell 4.62 percent.
In any case, it is not known exactly from which specific trades the top performers made money. However, investors and other experts point out that the fundamental strategies — those that rely on humans to pull the trigger — fared much better than the CTAs (commodity trading advisers), trend followers and quantitative-driven funds. Managers such as Jones rely heavily on playing trends, but they make the decisions, not their computers.
“They followed what the central banks did,” says one investor.
As for specific markets, those who did especially well took big advantage of the strong gains in the U.S. stock market, for example. U.S. Treasury curve-steepener trades also did very well. This involves using derivatives to go long one end of the Treasury market and short a different maturity as interest rates spreads widen.
Another very profitable trade involved being long the Japanese stock market and simultaneously short the Japanese yen. In addition, anyone who was short precious metals, including gold, and long natural gas/crude oil — but not necessarily in the same trade — likely did well, points out Peter Laurelli, vice president in the research group at eVestment. The currency market was profitable for investors who were long the U.S. dollar or the euro versus the Australian dollar, Brazilian real or Indian rupee.
What is the best way for managers to sustain these gains in 2014? Managers need to keep a close eye on what the Federal Reserve does, especially when it comes to further tapering, and, quite possibly, raising short-term interest rates.
