| Photograph by Fredrik Broden |
On January 15 the Swiss National Bank unexpectedly lifted a three-year cap that had been keeping the Swiss franc from trading above 1.20 against the euro. The abrupt about-face sent the franc surging by some 40 percent against the euro by the end of the next day — and triggered billions of dollars in losses at banks and foreign exchange brokerages. Not surprisingly, it also sent hedge fund managers who had been betting against the currency scrambling to cover their positions.
Some managers were unable to recover. London-based COMAC Capital, a $1.2 billion firm founded ten years ago by Colm O’Shea, a protégé of George Soros and Dmitry Balyasny, made the decision to return all outside capital to investors. Marko Dimitrijevic, who grew up in Switzerland, decided to close Everest Capital’s $830 million Global Fund after it suffered huge losses in its Swiss franc position, though the Miami-based firm still manages about $2 billion.
But for all the carnage it caused, the Swiss National Bank’s decision was also a beacon of hope. To many macro managers who have performed badly for the past four years owing to rescue-mode monetary policy at the world’s largest central banks — which banded together after the financial crisis of 2008–’09 to intervene in global markets, slashing interest rates and creating stimulus measures to avoid financial catastrophe — the Swiss franc move was a sign that volatility is back.
Over the past six months, the financial world has changed dramatically, providing a slew of new opportunities for macro managers. The dollar shot up quickly against the euro starting in August and has continued to rise with such speed that U.S. corporations are now blaming it for lower overseas profits. Oil prices began a steep decline in the fall and have since plunged more than 50 percent, triggering currency moves in different directions in importing and exporting countries. The U.S. equity market has been on a roller coaster. Perhaps most important to global macro strategies, central banks around the world have finally stopped operating in tandem: As the U.S. moves slowly toward a rate hike, Japan is maintaining its faith in Abenomics, and the European Central Bank has embarked on a massive stimulus plan.
All of these ingredients create a recipe for volatility and idiosyncrasy, two factors global macro traders need to thrive. And thrive they have: ISAM, a London-based firm headed by former Man Group CEO Stanley Fink, posted an 11 percent gain through the first half of January, including a 7 percent increase from the Swiss franc move, in its International Standard Asset Management Systematic program. ISAM’s systematic fund gained more than 60 percent last year and is a shining example of the divide that has emerged between systematic and discretionary managers in the recent macro comeback. Man Group is another London hedge fund firm focused on computer-based models that has benefited from the Swiss franc trade: Its $4.4 billion Man AHL Diversified fund gained 4.5 percent in the first half of January and rose 32 percent last year.
“We’ve gone from a remarkable lift in all assets to a market that is going to be dominated by these macro factors, so it could be the best year for macro traders that we’ve seen in a long time,” says John Burbank III, founder of San Francisco–based hedge fund firm Passport Capital, which manages $4 billion.
It’s hard to overstate the conditions that led many investors to stray from the strategy in the first place. The coordinated intervention of the world’s central banks after 2008 left no differentiation among markets and essentially abolished the ability to trade on significant value changes in fixed income, equity securities and currencies. The banks responded quickly to any sign of distress, but those moves never stuck long enough to create the volatility that macro managers — who base their investments on movements in economic and political trends affecting different countries and asset classes — crave.
“Predictions get wiped out when you have markets consistently chopping and changing just off headline-type events,” says Matt Osborne, executive vice president and co–portfolio manager of mutual funds at La Jolla, California–based investment adviser and commodity pool operator Altegris Advisors, which manages $2.5 billion in assets.
The choppiness took a toll on macro traders, both systematic and discretionary. London-based European hedge fund manager Brevan Howard Asset Management, which managed more than $36 billion as of September, posted its first-ever losing year in 2014, when its flagship Brevan Howard Master Fund, which holds most of the firm’s assets, fell by 0.8 percent. Robert Citrone’s South Norwalk, Connecticut–based Discovery Capital Management’s Global Opportunity Fund posted a 3.2 percent decline for the year, while the firm’s Global Macro Fund lost 8.54 percent. Caxton Global Investment, managed by New York–based Caxton Associates, which has $7.7 billion under management, lost 1.36 percent last year.
Although some of the most legendary macro traders fared slightly better last year, their gains were still paltry compared with their historical returns. Paul Tudor Jones II’s $10.6 billion Tudor BVI Global Fund, managed by his $13.5 billion Tudor Investment Corp. ended the year up 3.2 percent, and Louis Bacon’s $15 billion Moore Capital Management also ended 2014 on a positive note, with its flagship Moore Global Investments fund growing 1.7 percent after being down through October.
Jones, one of the macro pioneers, has been disgruntled by the environment of the past few years. “I actually find myself daydreaming about winning Dancing with the Stars on some days in the office,” he told an audience at the Sohn Investment Conference in New York in May. “It’s gotten to be very difficult when you depend on price movement to make a living and there is none.”
Jones may have to put away his dancing shoes. Today movements in the prices of crops, commodities and currencies around the world mean something again. Assets are returning to precrisis levels of so-called noncorrelation, moving independently of one another instead of reacting in the same way to the same macro threats, according to Altegris’s Osborne. “Not having all [assets] going in one direction is what creates the opportunity,” he says.
In the past few years, keeping a close eye on something like grain yields or oil supply became much less relevant; now, with markets beginning to move in different directions, that expertise — on which many discretionary macro fund managers pride themselves — is again a useful weapon. Not only have the world’s central banks diverged from one another, but commodities have diverged from equities, finally leaving behind the artificially high correlations of the postcrash period.
This turnaround is even pulling skeptics into the fold.
“I wouldn’t say it will be a meaningful allocation, but we are, for the first time in quite a few years, contemplating moving some capital into global macro,” says Raymond Nolte, CIO and co–managing partner at SkyBridge Capital, a New York–based fund-of-hedge-funds manager.
In the past few months, two of the most lucrative trades have been betting that the U.S. Federal Reserve will hold off on an interest rate hike and that the dollar will continue to rise. Many macro funds made the opposite calls last year, and it cost them. Passport’s Burbank says expectations about Fed actions in 2015 should be tempered. He predicts that instead of five or six rate hikes over time, we’re more likely to see one very small hike, followed by more accommodation.
“I think the big change this year will be that the dollar rises because of the imbalance of QE,” Burbank says. “As the dollar rises, things could slow down. It could hurt U.S. company earnings and slow down the economy, and it could cause the Fed to not hike at all or to hike once or twice and then stop.”
Some managers are even hesitantly looking toward investing in fixed income this year. Although SkyBridge’s Nolte says he is staying away because “buying bonds at 2 percent just does not represent a good value or a good risk return,” others are a bit more open to the idea. “I think there are opportunities in the fixed-income market,” says Arvin Soh, a New York–based portfolio manager for London’s GAM. “There’s a gap between where market participants think currency markets should be versus where they are now.”
Oil should be a good opportunity in 2015 — at least, for those who can play it right. Most managers say they will remain short the commodity for a while, but Burbank says the sentiment isn’t strong enough. “Very few people have been appropriately negative,” he explains. “I find people to be way too bullish and optimistic about when oil’s going to bottom; too many people want to buy energy assets — equities or high yield. Our view is that oil is significantly oversupplied and it could go down more and stay down longer than people imagine.”
Other investors also are wary of oil but believe it will have far-reaching impacts that will benefit other strategies. Osvaldo Canavosio, head of global macro in the manager research division at London-based fund-of-funds firm FRM, a division of Man Group, sees an indirect opportunity, predicting that the plummeting price of oil will have a ripple effect on currencies and other commodities in emerging markets. As major exporters of oil, Russia and Venezuela in particular may suffer, whereas some importers in Europe and Asia may benefit from the price plunge. “I think it may be an interesting catalyst to trigger some fundamental differentiation, which is a good, positive thing for the opportunity set for macro strategies,” Canavosio says.
The future seems rosy for macro managers, but there is a caveat: Not all substrategies are created equal, and systematic funds are far outpacing their discretionary peers. Systematic funds and commodity trading advisers grew by 6 percent in the fourth quarter of 2014, compared with the broader macro strategy’s 2.9 percent gain, according to the HFRI Macro: Systematic Diversified/CTA Index, published by Chicago-based Hedge Fund Research, which tracks global hedge fund performance.
That difference is “a story of man versus machine,” says Philippe Ferreira, head of research at Lyxor Asset Management’s managed-account platform in Paris. “Machines hugely outperformed in 2014.” An increasingly volatile world in which central banks have to move in different directions is exciting for macro managers in general, but those on the discretionary side have a hard time cashing in on these trends when rates don’t move. “If you’re a discretionary manager, with interest rates so low globally it’s been very difficult to carry long positions in the face of such incredibly low, and in some cases negative, yields,” says Altegris’s Osborne.
On the flip side, systematic managers, who employ a more technical analysis using computer models, have thrived. Experts believe this dichotomy will continue through 2015, though prospects for discretionary funds are expected to improve as the year goes on.
For any macro strategy the first few weeks of this year have been turbulent. For some this has been crushing; for others it’s been a welcome change. The oil plunge, the Swiss franc move, the ECB’s stimulus announcement and a frustratingly noncommital late-January meeting of the Federal Open Market Committee have created a climate of more volatility than macro managers have seen in years. The prevailing prediction is that the mere presence of this much divergence and activity will be enough to buoy macro strategies — especially systematic funds — through at least the end of this year.
