Macro traders are off to a mostly rocky start this year, and some of the industry’s best-known names are suffering a slump.
One of those managers, Moore Capital Management’s Louis Bacon, tells Alpha that while he’s cooling on the U.S. equity market, which hurt him in February, he thinks that at least one big trade from 2013 will pick up steam again later this year.
The average macro fund is up just 0.74 percent after gaining slightly more than that in February, according to industry tracker eVestment. In the past six months, macro funds are up only about 3 percent, although this is slightly better than the 2.51 percent gain in calendar year 2013.
However, the averages belie that performance varies widely from fund to fund. For example, eVestment notes in its February report that smaller managers were primarily to blame for macro funds’ lagging the industry last month. Average returns from macro strategies with greater than $1 billion gained 3.2 percent in February versus about 0.8 percent for all funds, ranking them near the top of the hedge fund industry in general.
But not all large funds have fared well. Alan Howard’s BH Macro, run out of London-based Brevan Howard Asset Management, has lost money in each of the first two months of the year and is down 2.51 percent through the end of February. And through February 20, Bacon’s Moore Global Investment was off by 1.51 percent.
Investors have been hurt by sharp reversals in several markets. Global stocks have been volatile, suddenly dropping, then rising, then dropping again before rebounding. The Japanese yen reversed its decline against the dollar earlier this year and began to rally.
“Several longer-term conviction trades detracted from performance, such as long U.S. dollar and the Japan reflation,” says GAM, an investment management firm with global assets under management of more than $120 billion, in its February roundup letter.
In fact, Moore’s Bacon is taking a wait-and-see attitude these days as he keeps an eye on how certain critical markets play out. In a telephone interview, Bacon says he is trying to figure out how much risk he can hold and simultaneously hedge it.
At the end of the year, he was heavily long equities, which served him well in 2013, when MGI was up 17.02 percent. However, Moore was hurt in January when the global stock markets initially declined.
Bacon is still committed to equities but not as heavily as in the past. “There are still decent opportunities, but valuations are not the same as one and a half years ago,” he says.
In general, Bacon thinks that if there are some movement in interest rates, the macro markets will become more interesting. And although the big Japanese trade — going long stocks and short the yen — seems to have slowed, reversed or abated somewhat, Bacon is confident it will resume later this year. He says part of the problem is that the Japan trade could be a passing fad because Japanese companies don’t do a good job of rewarding investors since they tend to hoard their excess cash.
“The U.S. is a much more shareholder-friendly place to be,” he insists. After all, many companies these days — and for many years — frequently use their huge cash hoards to reward shareholders, either in the form of higher dividends or share buybacks and in some cases by making acquisitions. However, Bacon says emerging-markets companies are even worse than Japanese companies, because the profits tend to end up with management instead of investors.
Meanwhile, Bacon does not see any attractive plays in the currency markets. He says the big wild card in the global markets is China. Investors are wondering whether China is deflating its bubble gradually or cruising for a big bust. “That’s the big question,” Bacon says.
He says data from China is so opaque, it is hard to take a strong position on a portfolio based on the official data. “You can’t steer by the data,” he asserts. “It’s like trying to do surgery in a shaky railroad car.”
How does Bacon think China will play out? Does he think it will pop like one of those nasty historic market-wrenching bubbles?
No, he says. He believes growth in China will come down, but he is confident the government can control the descent. Has he made a bet on the market’s outcome? Not yet.
“The bubble is deflating, but China is a command control economy with a blocked currency and enormous savings,” Bacon says. “It will therefore be able to control the bust, it would seem. But they keep backing away from the necessary reforms as they will hasten the denouement.”
The upshot: Bacon is short the currency because he says a weaker currency will be part of any solution.
