It is no secret that 2014 has turned out to be the year of the commodity trading advisers, or CTAs. We have been chronicling their comeback all year.
However, while the computer-driven macro funds have been mostly leading in an otherwise dismal year for most hedge funds, their human-driven counterparts — the so-called discretionary macro funds — have been greatly lagging the market. Many of them have been battling all year to remain in positive territory and hobbled into December barely profitable.
And although most of them posted strong gains in the first week of this month, they are still greatly lagging the systematic set. For example, among the biggest and most high-profile funds, Louis Bacon’s Moore Global Investments, managed by New York–based Moore Capital Management, had gained just 1.88 percent through November.
Paul Tudor Jones II’s Tudor BVI Global Fund, managed by Greenwich, Connecticut–based Tudor Investment Corp., returned 3.7 percent through December 5 after being up 1 percent in the first week of the month. The Tudor Discretionary Macro Fund gained 1.43 percent through December 5 after gaining 1.84 percent in the first week of the month.
Andrew Law’s Caxton Global Investment, managed by New York–based Caxton Associates, is still down 1.42 percent for the year through December 8 despite gaining about 1.2 percent in the first part of this month. Alan Howard’s Brevan Howard fund was down 0.73 percent through November and down about 0.82 percent through December 12. It is managed by London-based Brevan Howard Asset Management.
Even smaller funds are struggling. The Comac Global Macro Fund, managed by London-based Comac Capital, a $1.2 billion hedge fund firm founded by onetime Soros Fund Management portfolio manager Colm O’Shea, moved into positive territory in November when it gained 2 percent for the month. It is up just 1.13 percent for the year.
So, why is the discretionary crowd having so much trouble keeping up this year? For one thing, unlike the CTAs, most of them have not reaped the benefits of the falling price of oil.
“We had a very small position,” says one fund-of-funds manager with a big bet on discretionary macro.
According to Philippe Ferreira, head of research for the managed account platform of Lyxor Asset Management, CTAs got three things right that the discretionary managers missed. For one thing, CTAs were long interest rates for most of the year after the early January selloff. However, the discretionary macro managers were short fixed income most of the year, banking on the U.S. Federal Reserve and perhaps other central banks finally raising interest rates, as many pundits were anticipating.
Discretionary macro managers were also too bullish on European equities, preferring those stocks to U.S. equities based on valuation, according to Ferreira. “CTAs were not reading the valuations or the economy,” he says. And finally, sometime during the summer, CTAs turned very bearish on oil prices, shorting various futures contracts, while macro managers were neutral or slightly bearish, Ferreira explains.
In fact, trend followers derived about half of their November performance from short oil positions, according to Anthony Lawler, portfolio manager at London-based with GAM Alternative Investments Solutions.
“Macro managers think,” says one prominent hedge fund manager. “No one thinks oil is going to go down 50 percent. A machine doesn’t think.”
Lawler also noted in a recent report that about one quarter of CTA gains last month came from long positions in U.S. and European fixed income and the rest from being long the U.S. dollar and long equity positions. For example, the Comac Global Macro Fund tells clients in its November report that its 2 percent gain for the month was mostly driven by long U.S. dollar trades, especially versus the Japanese yen, and to a lesser extent, long global equities. However, it also told clients these gains were partially offset by losses from shorting U.S. fixed income.
Two of the most popular trades among discretionary managers last month — long oil trades and short interest rate trades — reflect an inherently positive view of the global economy. CTAs don’t generally make these kinds of judgments. They just look to ride trends. So, while many human-led macro funds also benefited from being long the U.S. dollar and equities, several of them were hurt by being short fixed income.
Not all macro funds have been long oil. Robert Citrone’s Discovery Global Opportunity Fund, managed by South Norwalk, Connecticut–based Discovery Capital Management, had “a modest net short in energy stocks” heading into the OPEC meeting on November 27, according to the firm’s weekly e-mail commentary to clients. The firm told clients that when OPEC surprisingly took no action that day although many speculators were expecting it to cut production, the hedge fund “sold some energy stocks, and bought U.S. dollars against the currency of several major energy exporters” in response. The fund, which has been struggling all year, has been staging a strong late-year rally, cutting its loss for the year to 4.63 percent, according to an investor.
