eVestment|HFN Strategy Focus Report: Macro

Date: Wednesday, February 29, 2012
Author: Peter Laurelli, CFA, Vice President of Channel Capital Group Inc.

The eVestment|HFN active and inactive databases have performance and asset information for 468 unique funds that invest across a variety of markets with a macro approach. The macro fund universe is one of the more diverse in approaches to trading. There are very large funds investing across the spectrum of markets to funds focusing on specific regional markets and securities. The common thread is that macro, or large scale trends are the primary influence in the trade decision making process, whether those be employed in a full systematic or discretionary approach or a combination of both.

�Macro funds generally outperformed the aggregate hedge fund industry in 2011 (-3.7% vs. -5.0%) and on an asset weighted basis, performed significantly better (+1.2% vs. -1.6%).
�Macro fund assets under management ended 2011 at an estimated $200.2 billion, an increase of 2.0% during the year. Investor flows were positive, but below the average rate of growth for the industry in 2011.
�The equity market rebound to begin 2012 resulted in macro funds lagging the industry in January. Smaller funds performed better than large, but were still behind the aggregate industry.

The global environment for economic, political and financial markets in 2011 was ripe with large scale influences that could have greatly benefited those macro funds with a firm grasp of how events would influence certain assets and in turn how shifts in different asset prices could impact others. The remainder of the report compares performance and flows across macro strategies and the various sub-classifications eVestment|HFN is able to track to get a better idea of who was able to perform well in 2011 and what that means for 2012.

Total Asset Levels and Investor Flow Trends

eVestment|HFN tracks monthly AUM and publishes asset estimates for funds that invest primarily in macro strategies. Macro strategy exposure may be significantly larger, however tracking the approach within multi-strategy funds is not possible at this time.

�Total estimated AUM in macro strategies was $200.2 billion at the end of 2011, an increase of $4 billion, or 2.0% during the year. Investors added a net $1.7 billion and performance added an additional $2.3 billion.
�Macro fund AUM core growth of 0.9% lagged the 1.1% overall core growth of the hedge fund industry in 2011. CTA managers which share many of the characteristics of macro funds, but are currently classified separately, had well above average core growth in 2011.
�eVestment|HFN estimates CTA managers had $198.7 billion in AUM at the end of January 2012 and took in $11.7 billion in 2011, or 5.9% core growth.
�Early estimates for January 2012 show macro fund AUM fell slightly as redemptions barely outpaced new allocations. Performance was additive, but not enough to offset outflows. CTA managers had slight inflows to begin the year.

The eVestment|HFN classification for macro and CTA managers had historically been separate, but due to the many similarities in the markets and approaches between the two, the classification will be combined as the eVestment and HFN datasets are combined, with CTA being a sub-classification within Macro. The combined data indicates an increased level of investor interest in these funds during 2011 and into 2012.

Performance by Fund Size

Table 8 compares the performance of macro funds by strategy assets under management (AiS). Groups were created using each fund�s AiS at the beginning of each period to best represent the performance of large vs. small funds over a given time frame.

�Large (>$1B) macro strategies performed notably better than mid-sized (>$250M, <$1B) and smaller funds (<$250M) in 2011. The advantage is magnified for very large funds, those with more than $3 billion, which returned an average of nearly 6% in 2011.
�Some major trends in place during 2011, including highly volatile equity markets with emerging markets falling, declining treasury yields and a strong USD, shifted in January. As smaller macro strategies jumped during the month and large funds were closer to flat, this change showed some of the biases within exposures between large and small funds; the latter able to benefit more significantly from the rising equity markets in January.
�The lagging returns from large funds over time is directly related to underperformance pre-financial crisis. This may be another example of large funds focusing on trends which may develop over longer time frames and in this case, positioning ahead of the financial crisis.

Performance by Regional Exposure

Figure 9 includes performance for macro funds which specifically target the markets and securities of specific regions or countries. The strategies state their investment process is primarily influenced by the macro factors impacting these regions. The subset is unique within the broad macro classification. The Latin America focused sample was relatively small in 2011 so results should be taken with a grain of salt. Performance was very mixed within the sample and negative average performance is not indicative of the strategy.

The sample of macro funds targeting Asian markets is fairly robust for a niche classification and lagging returns from these funds is an indication that predicting macro influences on Asian markets has been more difficult than the more typical long/short equity exposure to the region.

Performance by Asset Focus

Macro strategies may focus on the influence large trends have on specific markets and the eVestment|HFN data set tracks macro fund exposures to FX, credit and commodity markets.

�Macro funds trading in both interest rate and FX markets clearly performed better than their peers during 2011 and the broad hedge fund industry. Like most macro strategies, when compared over longer time frames to the industry the comparison is less favorable.
�Purely credit focused macro strategies underperformed their peers, the group showed virtually no correlation to other alternatives strategies over various timeframes.
�Macro funds with primarily commodity exposures appear to be the most volatile sub-classification, but have outperformed in that last two years ending January 2012.

Going Forward

Macro strategies historically perform well relative to most hedge funds and broad equity markets during periods of difficulty and lag during periods of market recovery. Outperformance has been most noticeable during the crisis periods of 1998, 2002 and again in 2008 and when CTA managers are included in the analysis, they further support the notion.

There are still some large themes from 2011 hanging over global markets, but the rebound in equities in early 2012 poses a difficult environment for many macro strategies relative to the broad industry. Investor flow trends towards the end of 2011 and early in 2012, when looking at macro and CTA managers combined, show investor sentiment towards the group is above average.

Historical flow data indicates net outflows for the strategy do not appear to be heavily influenced by industry underperformance, but are more directly tied to losses, and the reaction tends to be swift due to the liquidity the funds are able to provide. While relative performance may suffer should current trends hold, the strategy will likely fair well from an asset gathering perspective due to large scale factors (Europe, Iran/oil) posing threats to global recoveries.

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