Macro investors had a rough time in January.
Many of the most high-profile global macro hedge funds lost money last month — at the same time many of their stock-oriented peers enjoyed strong gains — as many of the hot trades immediately following the November U.S. elections have been diverging of late.
For example, Bridgewater Associates’ Pure Alpha I fund fell 0.6 percent during the month, while Pure Alpha II declined by 1 percent. (As is often the case, Bridgewater’s All Weather risk parity fund moved in the opposite direction. It returned 1.4 percent last month.)
Brevan Howard’s Brevan Howard Master Fund lost 1.5 percent in January. In 2016 it was profitable for the first time in three years.
Caxton Associates’ flagship Caxton Global Investments fund fared even worse, dropping about 2.4 percent in January. In 2016 the macro fund headed by Andrew Law had posted its best performance in the past four years, rising 6.4 percent.
Bridgewater and Brevan Howard had been in losing territory for most of 2016 but staged strong rallies after the election, enabling them to turn positive. Unfortunately for them, the Trump trades suddenly reversed direction in mid-December.
Experts point out that in January, the only macro trade that worked was being long the equities market. Over the past six weeks, the dollar has changed direction and gone down, while fixed income has sold off, sending rates higher.
Paris-based Lyxor Asset Management points out in a report that the rise in bond yields “was more pronounced” in Europe than in the U.S. across the yield curve, which in turn led to the appreciation of the euro versus the dollar last month.
One investor in hedge funds says macro managers are also confounded by the fact that the stock market keeps going up while volatility keeps going down, as measured by the VIX. The investor points out that the Standard & Poor’s 500 stock index has not gone down by at least 1 percent for 80 straight days, the longest such streak since 2006. Many investors, however, have been long the VIX — a phenomenon this investor calls “amazing.”
Bridgewater founder Raymond Dalio had long warned about the risks of the economy being mired in an abnormally slow growth environment and that “monetary policy tools will be much less effective going forward.”
One week after the elections, however, he grew more upbeat, asserting in a letter to clients that he thinks an ideological shift to the right will create a better environment for business and the markets.
“Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist, etc.,” he added at the time.
By mid-January, Dalio had grown more tentative. In an interview, he told CNBC: “I think the market has discounted the obvious. Meaning, if you take the corporate tax rate and you change it by that amount . . . the market has adjusted now to that level. Now we’re at a point where we have to wait and actually see. I think the real question is what is a Trump administration? Is it going to be wise and thoughtful? . . . So we’re at the stage that we made the initial reaction to that, but now [we’ll see] how these people work together and actually operate.”
And then last week in the wake of President Trump’s ban on travelers from seven majority-Muslim countries entering the U.S., Dalio and co-chief investment officer Robert Prince expressed concern about the potential damage of his pro-populist policies, saying in a note to clients, “We are now in a period of time when how this balance tilts will be more important to the economy, markets, and our well-beings than normally dominant drivers such as central bank policies.”
We recently reported that Bridgewater generated a total of $4.9 billion in profits for its investors in 2016, according to a study conducted by fund-of-funds firm LCH Investments. Since its 1975 inception, Bridgewater has made a total of $49.4 billion for its investors, more than any other hedge fund firm.
Meanwhile, in the second half of last year, investors redeemed about $4.4 billion from the Brevan Howard Master Fund, lowering firmwide total assets under management to about $15.6 billion at year-end, down roughly 34 percent from the previous year.
