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Hedge fund head says times right for global macro

Date: Friday, February 27, 2009
Author: Joseph A. Giannone, UK.Reuters.com

In a period when volatile markets battered most hedge funds, global macro funds are proving their worth, Graham Capital Chairman Kenneth Tropin told Reuters.

During one of the hedge fund industry's worst years, Graham delivered gains of up to 41 percent in 2008 by making good bets on currencies, stocks, interest rates and commodities. And because the firm invests in highly liquid futures, clients had monthly access to cash even as many funds blocked withdrawals.

The combination of liquidity and returns that are independent of the broader market could revive interest in global macro funds, Tropin said.

"For a long time there was a perception that the biggest returns, the best risk-adjusted returns, were in other strategies. Then we had a market environment last year where most hedge fund styles ended up being correlated to each other and to the equity markets as well," he said.

Graham manages $4.9 billion in assets in human-directed funds and computer-driven quantitative funds. Funds in both categories invest across fixed income, currency, commodity and equity futures.

"Our style of investing offers some benefits, including liquidity and diversification, that may have not been appreciated as much as they should be," he said.

Graham's quant funds gained from 20 percent to 41 percent last year, while human-directed funds rose by 6 to 27 percent. By comparison, the average hedge fund lost 28 percent.

Meanwhile investors spreading money among a variety of strategies found that almost all of them suffered from the impact of a slowing global economy.

"One thing that became very clear in 2008 is that a lot of hedge fund styles had high correlation to what the equity markets were doing," said the Wall Street veteran, who began his career in the 1970s and in the '80s served as head of futures trading at Dean Witter.

Tropin later served as chief executive of John W. Henry, another leading managed futures firm. In 1994, he split off to start Rowayton, Connecticut-based Graham.


Global macro was once the synonymous with hedge funds, when the likes of George Soros and Julian Robertson's Tiger Management made sweeping bets on markets around the world.

And while macro firms like Tudor Investment and Caxton Associates thrived through the years, for more than a decade most investor money poured into strategies promising higher returns or low risk -- such as activist funds, long-short equity and credit funds.

Yet last year, when Lehman Brothers and Bear Stearns were knocked out by unprecedented volatility and the U.S. government was forced to bail out the banking industry, most hedge funds plunged and suffered a wave of client redemptions.

Volatile times are good for firms like Graham, Tropin said.

"There's a lot going on in the world and global macro is an interesting strategy when you have heightened volatility in fixed income markets, in Forex markets, in commodity markets," he said. Wide price ranges create trading opportunities, he said, are likely to persist this year.

"Something that I'm confident will continue is that markets will remain volatile. That gives us something to work with," he said.

Graham managed to short stocks, bet commodities would fall, took a positive view on the U.S. dollar and anticipated a flight to quality that would drive down interest rates. The firm's funds had profits in every month last year except for July and August.

Graham remains negative on equities and most commodities, positive on the dollar and generally positive on fixed income -- with the view that interest rates will continue to decline.

Tropin said Graham also helped itself by taking a more cautious approach in late in 2007, as mortgage and credit markets seized up, but before Wall Street really tanked. Too many other firms failed to pull back.

"At the end of the day, hedge fund managers underperformed in terms of risk management, deleveraging and adapting to a tough market," he said.

Graham did not totally escape damage. While it generated $800 million in trading gains, investors withdrew $1 billion from its funds.

Tropin said the industry's redemption woes are not over for at least several months, with investors at gaited funds are waiting for the chance to withdraw money. Still, the industry may start to recover in the second half, he said.

"I don't think the industry is falling off a cliff. It is having a pretty substantial correction," he said. "But it feels like we're getting closer to the end."

(Editing by Leslie Gevirtz)