| Michael Novogratz, Fortress Investment Group (Bloomberg) |
With the news that Fortress Investment Group has finally put its long-suffering Fortress Macro Funds out of their misery has come scrutiny of the global macro hedge fund strategy. But while macro managers haven’t exactly been covering themselves in glory lately, the fall of the Fortress funds does not really reflect what’s going on with most of their peers.
The Fortress Macro Funds — headed by Michael Novogratz, who founded the firm’s Liquid Markets business in 2002 and is also planning to retire — were down 17.49 percent for the year through September after dropping 1.6 percent last year.
“We have had an extremely challenging two years, and I do not believe the current environment is conducive to achieving our best,” Novogratz says in a press release.
Fortress co-chairmen Peter Briger and Wesley Edens and CEO Randal Nardone, added in a joint statement: “We are obviously disappointed in this outcome . . . While we regret closing a fund that has been productive in the past, we also recognize the market’s reluctance to ascribe value to this strategy even in its best years.”
The reality is that the Fortress funds were not the only macro funds to struggle somewhat in the past two years. A handful of the most high-profile, longest-running global macro funds in the business have not done particularly well over that period either. But they are not generating anywhere near the losses that forced Fortress to close its funds.
For example, last year the Brevan Howard Master Fund, managed by London-based Brevan Howard Asset Management, suffered its first losing year in its 11-year history, posting a 0.8 percent decline. As a result, the firm suffered major redemptions.
Firm-wide, assets shrank from $40 billion to $27 billion. About $5 billion left the house when New York–based DW Partners took over as manager for two funds previously run by Brevan Howard. Brevan Howard also shut down its $630 million commodities fund, which lost money last year. Meanwhile, the flagship Brevan Howard Master Fund declined nearly 1 percent so far this month through October 9 and is now down about 0.6 percent for the year.
Meanwhile, New York–based Caxton Associates, founded by Bruce Kovner and now headed by Andrew Law, is enjoying a good year for its Caxton Global Investment flagship fund, which gained about 6.9 percent through September, making it among the better-performing hedge funds this year. But the fund lost about 1.5 percent in the first week or so of October, and last year it lost about 1.4 percent.
Louis Bacon’s Moore Global Investments, managed by New York–based Moore Capital Management, is up just 1.75 percent this year through September after losing about 2.3 percent last month. It gained a mere 1.75 percent in 2014.
And Paul Tudor Jones II’s Tudor BVI Global fund, managed by Greenwich, Connecticut–based Tudor Investment Corp., was roughly flat through September after gaining just 3.5 percent or so last year.
Although 2013 was a good year for macro funds, most of them also posted single-digit gains in 2012. After little movement in the fixed-income and other markets for several years due to quantitative easing, macro funds had a number of opportunities this year to either make or lose a lot of money.
The stock market had been tumbling since the summer before rebounding over the past two weeks. Commodities, especially oil, have been in a free fall this year.
According to a recently published analysis from Lyxor Asset Management, global macro managers mostly dodged the volatility in the stock market in September by focusing on foreign exchange and interest rates. We had earlier noted that these funds, on average, had entered the month having cut their equities allocation from 15 percent to 10 percent.
Lyxor notes that for macro funds, the “bulk of their directional exposure” was in foreign exchange trading. They “produced marginally positive returns” from being long the U.S. dollar versus the euro, British pound and Canadian dollar.
“Their market timing on rates added gains,” Lyxor noted. “They rapidly rotated their bond exposures back to the U.S., as it became probable that the Fed’s normalization process would be postponed.”
In August macro funds were doing pretty well until the final week of the month, when they were unable to withstand the huge declines across a variety of markets. “While cautiously exposed to risky assets, their hedges had little efficiency in the selloff,” Lyxor said in its August monthly report.
Macro funds were hurt by their long positions in equities and U.S. dollar positions and had “limited cushion from bonds or safe havens.”
However, in the end only Fortress wound up getting it mostly wrong.
This included its bet on China, where Novogratz was said to be bullish. At the SALT conference in May, for example, Novogratz told the audience the most interesting market was China, since it had undergone its own quantitative easing. For years people worried about huge excess capacity and a real estate and industrial bubble, he noted.
However, he told the audience all the monetary and fiscal easing is stabilizing the economy. “I think it will succeed and take tail-risk of disaster away,” he said. Novogratz also pointed out that the Chinese government is trying hard to drive wealth to the consumer. He said Chinese people love to gamble and the government is encouraging them to buy stocks. “China will enter one of the great bull markets we will ever see,” Novogratz said.
And at the July 2014 Delivering Alpha conference, Novogratz was bullish on Brazilian stocks and interest rates. However, since then the Ibovespa Brasil São Paulo Stock Exchange Index is down about 17 percent. The funds also reportedly had big losing bets on the Brazilian currency and interest rates.
The biggest winner: shareholders of Fortress. The firm will repurchase Novogratz’s shares in the company at $4.50 per share, which it says is equivalent to a 17 percent discount to the closing price on October 12. As a result Fortress’s dividend-paying share count will be reduced by about 13 percent. On Tuesday the stock closed up 7.54 percent.
