| Arvin Soh, GAM |
Arvin Soh, a portfolio manager in GAM’s Alternative Investments Solutions group in New York, is the first to admit that he has a challenging job. Since 2006 he has managed the fund-of-funds firm’s global macro strategies, along with its CTA portfolios and several multistrategy segregated accounts. Macro funds overall have just begun to recover from a swoon that started in 2010, when the Hedge Fund Research macro index declined by 8.06 percent for the year. After four years of negative performance, the HFRI macro index is up 3.76 percent year to date through September. During that time, GAM’s macro portfolio managers tried a new approach to macro investing: allocating more to customized vehicles to take advantage of the highest-conviction investments. Now about half of the firm’s macro allocations are in customized vehicles, including managed accounts. GAM’s macro portfolios are running close to macro overall, up 3.41 percent over the same period, with an annualized performance 4.64 percent, which is slightly above the HFRI’s 4.58 percent over the same period. Soh, 42, spoke with Alpha about how he has avoided the worst-performing components of global macro funds. Q: We’ve been hearing since 2010 that macro fund managers have been in a slump because political policies often intervene with big macroeconomic trends. What do you think is wrong with macro?
A: I think there’s some element of truth to the idea that macro funds are having trouble making money with the world where it is right now. With interest rates close to zero and central banks doing all that they’re doing to stabilize the global economy, this makes it difficult. Macro fund managers try to benefit from diversification of different asset classes or one country versus another, so it really limits the opportunities to have all countries all over the world in the same mode — which until fairly recently was rescue mode. But if we look back, there have certainly been some opportunities in macro each year since 2008. Were these opportunities significant enough that they could have generated consistent returns in the high teens? I think the answer is no. But were they significant enough that they could have generated returns higher than the market benchmarks? Yes. But you would have had to invest in a different fashion.
Q: What is that fashion?
A: You would have had to be concentrated on the area where the opportunity was each year. In 2011 it was the sovereign crisis. Then 2012 was all about credit; you could have made double-digit returns from the rally in the credit market. In 2013 you had to have substantial equity exposure to generate significant returns. So far this year the best returns have been in currencies. The issue is that, with the institutionalization of hedge funds, macro managers have become much more diversified. If we go back to the 1990s and early 2000s, they tended to be much more willing to put their risks in one area. Typically, macro managers ran portfolios with volatility in the midteens; now their volatility is roughly half that, and part of that is tied to diversification. Most managers are in all strategies today. They have tighter constraints in terms of stop losses, liquidity, drawdown rules and diversification. That’s okay as long as you’re in an environment where there are opportunities in numerous asset classes.
Q: Would you prefer a more concentrated portfolio, then?
A: Yes, and we’ve come up with a few creative solutions. One way to do this is the straightforward approach: We just look at more specialized managers. A dedicated currency or emerging-markets or commodities manager is not going to be as constrained. We’ve also invested in early-stage managers. Then we’ve come up with customized solutions, such as managed accounts or funds of one, where we will say we like a certain type of exposure and want to concentrate on it, or we want to invest through these specific traders. Even within systematic mandates we might exclude certain asset classes. For example, historically we tend not to like managers that sell options. There have been times when we’ve said you have to constrain your options strategy or even eliminate it altogether for us. At other times we will set up a customized commingled account. In this case the aim is to have a portfolio that concentrates on a specific asset or in a few specific areas. We expect in most cases to get a higher-volatility return from that account. It might be something the manager believes is a good investment, but it doesn’t fit the confines of the commingled fund. Or it might be an investment where we’ve been seeing a lot of dislocation and volatility that should translate to interesting returns.
Q: Where do you think the best opportunities in customized vehicles are going to be in the next year?
A: We are keeping an eye on the credit and illiquid world. If there were a significant default or devaluation requiring forced liquidation in emerging markets, we’d consider creating a special-purpose vehicle. In emerging markets there’s been significant volatility, although we haven’t yet seen any actual crisis. We expect that the U.S. Federal Reserve Bank will begin to hike interest rates sometime in 2015. Historically, when the U.S. raises interest rates, it’s very difficult for emerging markets, so there might be an opportunity to set up a special vehicle for that, which could be expressed via credit, equities, currencies or even just sovereign rates.
Q: What kind of expectations do you have for performance from these vehicles?
A: We definitely expect double-digit returns from our investments. Anytime we invest with a more specialized manager, we expect a higher return than with a more diversified manager. It’s compensation for risk, but also we think the skill set is better because of that focus.
Q: Do you limit the size of your allocation to any one special vehicle?
A: We do have terms about the maximum allocation we’d want in any portfolio. Some of our mandates are really concentrated; those are cases in which the client wants us to have just a handful of names. But a good rule of thumb is that it’s very uncommon for us to have more than 10 percent of our portfolio invested with any one manager.
Q: It sounds like you manage to have your cake and eat it too in terms of being diversified overall but concentrated in some high-conviction areas.
A: Yes, but we’re also cognizant that things can go wrong. The environment now for macro and CTA funds has been difficult, but we’re pretty optimistic because we can see drivers changing. We’re getting some divergence in the outlook for the U.S versus other countries, which should lead to an increased opportunity set. We’re seeing different comments coming from central bankers; some feel their currencies or interest rates are too high, while others feel they’re too low. Yet generally, markets haven’t reacted to this. The discrepancy between what the heads of central banks are saying versus what markets are pricing typically leads to increased volatility and more sustained market movements, which increases the opportunity set for both global macro and CTA funds.
