Brevan Howard Asset Management, the London-based, macro-focused hedge fund giant, is on track to post only its second annual loss. The firm is far from alone, however, as its performance difficulties reflect what has been another difficult year for the long-flagging hedge fund strategy.
The Brevan Howard Master Fund — the firm’s big flagship macro fund, which famously thrived during the financial crisis — has fallen nearly 3 percent this month alone through December 18. As a result, it is down 0.9 percent or so for the year, according to the results of BH Macro, a feeder fund investing in the Brevan Howard Master Fund. This means the fund has six remaining trading days to get back into positive territory for the year and stay there.
Last year the fund posted its first-ever annual loss since its inception in 2003, dropping a little less than 1 percent for the year.
It is not clear what specific trades are causing the fund’s pain this month. According to its November report, the fund has lost money this year trading commodities, equities and credit. Brevan Howard declined to comment.
Of course, this has not exactly been a great year for macro funds in general. Several months ago New York–based Fortress Investment Group announced it would close its long-suffering Fortress Macro Funds, which had lost 17.49 percent for the year through September after dropping 1.6 percent last year. Also, BlackRock recently decided to shut down BlackRock Global Ascent, another macro fund.
Through November the average macro fund had lost 1.75 percent, despite a 0.54 percent gain in November, according to data tracker eVestment.
Among specific funds, through December 11, MKP Opportunity Offshore, managed by New York–based MKP Capital Management, was up just 0.37 percent after dropping 2.35 percent so far this month. Through December 4, Greenwich, Connecticut–based Tudor Investment Corp.’s Tudor BVI Global Fund had gained only 0.68 percent after dropping 1.6 percent in the first few days of the month. Moore Global Investments, on the other hand, is up about 3 percent for the year through December 3. It is managed by Louis Bacon’s New York–based Moore Capital Management. Caxton Global Investment, managed by Andrew Law’s New York–based Caxton Associates, was up 3.53 percent through December 14.
Macro funds have faced a number of unexpected shocks to their portfolios this year, beginning in January, when the Swiss National Bank decided to let the franc float freely in the currency market after three years of carefully capping its trading range. Many funds also were not fully prepared for the collapse in commodity prices, especially energy prices. They also had to contend with the stock market’s sudden slump over the summer — and its equally unexpected rebound — and the devaluation of the Chinese currency.
And all along macro funds were trying to bet when the U.S. Federal Reserve would finally raise interest rates, which happened at last in December.
Macro funds got hurt in recent weeks in the lead-up to the rate hike and afterward, when the U.S. dollar depreciated against most developed-markets currencies. Some funds were also hurt by their short euro and Japanese yen positions and long bets on some emerging-markets currencies, Société Générale subsidiary Lyxor Asset Management points out in a recent report. On the other hand, the funds that have done well so far this month were probably short UK interest rates and commodities, especially energy.
Investors are starting to show some impatience with the macro strategy. According to eVestment, redemptions from macro funds in November came to $2.6 billion. Altogether, the strategy has faced about $5.6 billion in redemptions over the past three months alone. However, for the year, there has been a net positive flow of $6.7 billion into macro funds, according to the data provider.
Despite the recent outflow of funds, Lyxor notes that it favors macro funds — and to a lesser extent commodity trading advisers — as we head into 2016 in light of the Federal Reserve Bank’s interest rate hike, citing their “diversification properties.” Lyxor adds, “Both tend to outperform when the volatility regime is higher.”
Lyxor points out in its report that following the rate hike, the U.S. dollar once again strengthened. This works in favor of macro and CTA funds, since they both have what Lyxor deems “sizable long exposures to the currency.”
