Caxton Associates’ main macro funds are on pace to post their best results since Andrew Law took control of the firm from founder Bruce Kovner at the end of 2011.
Its flagship Caxton Global Investment gained 3.48 percent in August, bring its gain for the year through September 4 to 16.36 percent, according to an investor. Caxton Macro Fund, which is managed by Law, surged 5.6 percent in August and is now up 18.38 percent through September 4.
According to the investor, gains this year have come from interest rate bets, base metals, and ESG — investing based on environmental, social, and governance principles. Caxton declined to comment.
Law joined Caxton from Goldman Sachs in 2003 to build out its London office’s macro trading operation. He became chief investment officer in 2008, the year of the global financial crisis, and was credited with posting close to triple-digit returns in his trading book at the time.
In a client letter dated July 24 and obtained from an investor, Law devoted considerable space to its ESG strategy, stressing that this has been “a leading topic of due diligence inquiry” for some time.
“ESG is now [center] stage for us in active investment decision making in several areas as the impact of climate change becomes accepted by a large majority,” he added in the letter. “I believe that environmental concerns specifically will be a dominant factor for investors and consumers alike.”
Law said he has dedicated more resources to this area and “will continue to invest materially.” He explained that the energy and transportation markets “are already significantly responding to these pressures” and have made “a meaningful contribution” to the portfolio.”
“I expect the growing assessment of ESG to meaningfully impact pricing across numerous other assets,” Law added in the letter. He pointed out that government policy differs greatly throughout the world.
For example, he noted that the European Union has a carbon credit market that prices emissions for a large number of industries. “That may well be broadened and a carbon border adjustment tax be considered,” he adds.
In the U.S. several Democratic presidential candidates support the so-called Green New Deal, which could result in fiscal spending topping $1 trillion, he estimated.
In China, there have been huge incentives and investments related to the development of electric vehicles.
“Over time, all of these policies will evolve and the implications will be profound,” Law added in the letter.
Law also reviewed how he re-positioned Caxton several years ago to address the “transformative changes” undergoing in the asset management industry — such as the shift from active to passive investing, the limitations on investment banks to warehouse risk, and the increase in quantitative processes.
“We determined quite some time ago…that even those discretionary traders with access to significant flow no longer possessed the ability to successfully forecast price movement over the coming hours or days and, therefore, it is impossible for discretionary buy-side macro traders to do so on a consistent basis,” Law asserted.
He determined it is better for macro managers to reduce trading. He says Caxton’s core macro time horizon is eight to 12 weeks, although trades can be extended, reduced, or eliminated sooner based upon new information or unanticipated negative volatility.
One area Caxton has been focusing on is quantitative macro. Law stressed that most discretionary traders have introduced some computing power to their process. It does not have to be an either/or proposition.
Caxton has also heavily invested in global fixed income over the past several years.
“The reduced risk appetite of banks fuelled by the post-Great Financial Crisis environment has afforded opportunities to those buy-side firms willing and able to build sophisticated systems for pricing, monitoring, and the management of risk,” Law explained in the letter. “The moats around the business are deep.”
He added that Caxton is designed to have active turnover and to be liquid.
On the other hand, over the past few years Caxton has completely eliminated exposure to dedicated credit portfolio managers, citing the deterioration of liquidity due to the restrictions on banks’ risk appetite. This has resulted in “prohibitive” trading costs.
