| Collage by Alex Agius for Institutional Investor; Photos by BigStock |
So much for the macro revival.
After many of the macro mavens surged in the fourth quarter, especially following the elections, many analysts and other experts hailed the renaissance of the strategy. But the first quarter wound up being another disappointment along the lines of the past few years, when macro managers were often on the wrong side of major trades. While several funds were flat, others, run by firms including including Caxton Associates, Discovery Capital Management, Moore Capital Management, and Brevan Howard, finished the first three months of the year solidly in the red.
“The first quarter was a big disappointment, particularly considering the lofty expectations set at the beginning of the year for the strategy’s comeback,” said Christopher Solarz, a managing director at Cliffwater, an alternatives advisory firm.
For example, Andrew Law’s Caxton Global Investments lost nearly 6 percent in the first quarter; Robert Citrone’s Discovery Global Macro Fund posted a 5.5 percent loss, while the firm’s Discovery Global Opportunity Fund lost 3.2 percent; Brevan Howard Master Fund was down 2.4 percent; Louis Bacon’s Moore Global Investment lost 1 percent, while his Moore Macro Managers Fund was flat; and Paul Tudor Jones II’s Tudor BVI Global Fund was down 0.9 percent. One of the better performers was Raymond Dalio’s Bridgewater funds: Pure Alpha I was up 1.6 percent for the quarter, while Pure Alpha II rose 2.2 percent.
It is not known exactly how the macro funds were positioned or what caused the performance decline seen in the first quarter. In general, to have made money in the three-month period, a fund would have been best off heavily long stocks, as the Standard & Poor’s 500 stock index, the Nasdaq composite index, Europe, and Asia all surged. Presumably, most macro funds were not heavily exposed to equities. Macro funds were hurt by the big drop in volatility, according to some experts.
Also, a number of winning trades abruptly changed direction this year, including the dollar, which was strengthening after the elections but wound up down 2 percent in the first quarter. Macro managers were not on the winning side of other currencies. The euro was up 1 percent despite the rise of far-right parties in several countries, while the yen surged 5 percent.
Managers also missed the reversal in the fixed-income markets when interest rates, which surged following the election, fell back sharply in the first quarter, with the ten-year Treasury bill yield falling to 2.39 percent. “Everyone was saying it was going to 3 percent,” says one expert, “and the Fed raised rates too.”
Still, Cliffwater’s Solarz cautions to not judge macro managers by the first quarter alone. He’s looking at how they’ve performed since the election, mindful that macro managers typically see outsize gains in just one or two months a year.
Despite a difficult first quarter, Caxton’s and Discovery’s funds are still up for the past six-months. Caxton was up 10 percent in the fourth quarter, before losing almost 6 percent in the first three months of this year. And the Discovery Global Macro Fund was up 13 percent in November, helping it post a 7 percent gain for the fourth quarter.
Still, Lyxor Asset Management recently downgraded its outlook for macro strategies from overweight to neutral. Philippe Ferreira, head of research for the managed-account platform of Lyxor explains the firm finds macro funds’ very long positioning in the U.S. dollar versus the euro and the British pound at risk of reversal.
“The Fed has proved quite successful in managing interest rate hikes and any additional upside for the USD seems somewhat constrained,” Ferreira said in an e-mail exchange. At the same time, the European Central Bank and the Bank of England “are on the verge of reversing their accommodative stance,” he said.
“More generally, global macro is a very heterogeneous strategy,” Ferreira added. “As a result, we tend to be structurally neutral on macro managers, except when we find compelling evidence that the strategy is exposed to a common set of factors that may lead it to outperform /underperform other hedge fund strategies. This is not the case at present.”
