| Raymond Dalio, Bridgewater Associates (Bloomberg) |
At the Sohn Investment Conference in May 2014, legendary macro trader Paul Tudor Jones II of Greenwich, Connecticut–based Tudor Investment Corp. lamented, “Macro trading is as difficult as I have seen it in my career.” He cited the lack of volatility in a variety of markets due to inaction among global central banks as the primary reason. This environment started to change this year, however, as central banks began to employ different strategies to deal with their diverse economies. As a result, macro hedge fund performance has varied greatly entering the second half of the year. And a difficult June has led to even bigger swings.
Chicago-based data tracker Hedge Fund Research reported this week that its index of macro hedge funds lost 2.4 percent in June, its worst monthly performance since July 2008, and is now down 0.4 percent for the year. But when it comes to individual fund performance, “Dispersion is high,” notes Philippe Ferreira, a senior strategist at Paris-based Lyxor Asset Management, which manages about $21 billion in alternative assets, in a recent phone interview.
Ferreira says the best-performing funds that his firm tracks are up between 8 percent and 12 percent so far this year.
Experts think funds managed by Raymond Dalio’s Bridgewater Associates are among the best performers.
Other funds are in the middle of the pack. For example, Patrick McMahon’s New York–based MKP Opportunity Offshore fund gained 4.87 percent in the first half of the year after losing 1 percent in June. MKP Enhanced Opportunity, a higher-risk version, returned 7.87 percent in the first six months of the year after losing about 1.5 percent in June. The funds are managed by New York–based MKP Capital Management.
Of the onetime venerable Big Three macro managers, Andrew Law’s Caxton Global Investment, managed by New York–based Caxton Associates, notched a 3.7 percent gain through June 23; Louis Bacon’s Moore Global Investments, managed out of New York–based Moore Capital Management, returned 4.45 percent through June 18; while Jones’s Tudor BVI Global fund netted just 1.35 percent through June 19.
Meanwhile, Alan Howard’s Brevan Howard Fund, managed by London-based Brevan Howard Asset Management, returned 1.83 percent through Friday, June 26.
And two high-profile funds remain mired in the red.
Robert Citrone’s Discovery Macro Fund, managed by South Norwalk, Connecticut–based Discovery Capital Management, had fallen 4.3 percent through June 5, while Michael Novogratz’s Fortress Macro Fund, managed by New York–based Fortress Investment Group, was down 10.6 percent through June after losing 3.8 percent last month. The firm is planning a major overhaul of the fund, according to a recent Wall Street Journal report.
Still, even though the group as a whole was up less than 1 percent for the first five months of the year, investors continued to pour money into the strategy. In May alone, $5.1 billion was allocated to discretionary (human-driven, not computer-driven) macro funds, the fourth straight month of positive inflows and the largest monthly inflow since February 2013, according to eVestment. In 2014 macro suffered an outflow of more than $19 billion.
Lyxor’s Ferreira says funds that focused on Europe in the first half of the year did well, although they did give back some returns in recent weeks. In the first quarter, successful macro funds were long European equities, benefiting from the rally following the European central banks’ quantitative easing program.
In the second quarter, many macro funds made the right call on European bonds. In April the play was to start shorting the German bund. Then funds benefited from the sell-off in European fixed income.
MKP’s McMahon says some of the best trades in the first half were in foreign exchange, especially going long the dollar versus the euro, as well as long Japanese equities. McMahon’s macro roots stem from his fixed-income background as a mortgage trader at Salomon Brothers. Macro comprises approximately 60 percent of MKP’s business, while the balance involves global credit and commercial real estate.
In the first five months of the year, Brevan Howard tells clients, the firm made the most money from what it calls “macro” trades, which it defines as trading multiasset global markets, “mainly directional.” The majority of risk in this category is in rates, it adds. Brevan Howard’s second-biggest source of gains for the year is in the interest rate markets of developed markets (versus emerging markets).
On the other hand, Discovery is still trying to fully recover from its early-year losses from its big negative bet on the Swiss franc ahead of the Swiss National Bank’s decision to let the franc float freely in the currency market after three years of carefully capping its trading range.
Now, as funds try to navigate the Greek debt crisis and in general gear up for the second half, McMahon thinks this is an especially good time to be a macro manager. He asserts that 2015 is in the early stage of a shift from the prior, postcrisis world, where volatility was lower due to central bank intervention. Until recently, central banks mostly moved in lockstep, causing a high correlation between all risk assets.
“We are finding more opportunities than we have in a number of years,” McMahon said recently in an interview in his midtown Manhattan office. “There is a growing economic divergence across the globe.”
Within global credit, MKP has a more diversified portfolio but favors the U.S. over Europe, particularly in the commercial real estate market, which the firm thinks is a growing opportunity set. McMahon also likes CLOs (collateralized loan obligations) and parts of the RMBS (residential mortgage-backed securities) market.
Lyxor’s Ferreira says he sees macro managers shorting the euro versus the dollar to hedge European stocks. “This will compensate losses on their equity exposure,” he explains.
He says computer-driven macro funds are long the German bund and core European bonds in Germany, France and the Netherlands, for example, to offset drops in European stock markets.
On the other hand, he says the large macro managers in general have less exposure to Asia, except for perhaps shorting the Japanese yen, which is actively traded.
