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Macro Hedge Funds Still in a Funk

Date: Tuesday, April 9, 2013
Author: Stephen Taub, Institutional Investor Alpha

Despite recent sharpening of trends, many macro vehicles continue to plod through with sluggish returns.

Did macro hedge funds miss their golden opportunity in the first quarter? It sure seems like it.

For the past few years, many of these managers, and their cousins who are trend followers, have posted mediocre results and lagged most of the global indexes. They blamed their woes on the dearth of trades with a sustained direction. Rather, they kvetched that most of the markets they played would abruptly change direction after a short run.

So with the emergence of the great macro trades coming from the recent drop in the Japanese yen and a 20 percent jump in the Japanese stock market, the macro funds would have racked up tremendous gains in the first quarter, right? Well, not quite. As it turns out, many macro vehicles continued to post mediocre returns.

For example, Alan Howard’s Brevan Howard, which has been positioned for a choppy market in recent years, was up just 3.62 percent in the quarter and roughly flat in March. Never mind that in January Howard predicted to clients in a monthly letter that 2013 will be a very good year for macro investing. “We’re more optimistic about the opportunity set for macro trading now than we have been for some time,” Howard wrote at the time.

Howard attributed his optimism to the widely held belief that the U.S., Europe, China and Japan all have adopted the same game plan — loose monetary policies, devalued currencies, and the like. “In short, the world’s major central banks are ‘all in’ with very aggressive non-traditional monetary policy having become the norm,” Howard explained.

Meanwhile other vehicles plodded along. The Fortress Macro Fund was up about 3.75 percent in the first quarter. Through March 27 , one day before the end of the trading month, the London quantitative giant Winton Futures fund was up 5.18 percent for the year, while Caxton Global Investments was up 4.34 percent through March 26.

As of the end of March 25, with three days to go in the month, the high profile MAN AHL Diversified fund, another London-based quantitatively driven macro fund, was up just 3.56 percent. And with four trading days left in the month, Tudor BVI was up 6.85 percent, better than others but still not great.

These aren’t anomalies. The HFRI Macro (Total) Index was only up 1.43 percent in the quarter while its index of systematic managers was up only around 1.24 percent.

Experts say many of these macro funds should have performed better. In its quarterly report, eVestment said that directional equity strategies fared the best in March and through the quarter, especially those funds targeting Japan and the country’s loose monetary policy. “They are off to their best start on record,” it said, though it did not identify specific funds.

Peter Laurelli, head of industry research at eVestment, says that among large macro funds, chances are one trade cannot dominate a portfolio. Laurelli says that in looking at data from the prototypical large macro funds since November, when the Yen/Nikkei move got started, he sees some funds that have done very well — moving up 6 percent to 10 percent — and some that are down 1 percent to 4 percent, but he declines to provide details.

By way of explanation, Larelli points to the spectrum of assets across macro funds, the correlation among certain markets such as oil, gold, ten-year notes or different currency pairs, how dependent many positions are on relative moves across these markets, and the variation in some of these markets, “you can see how one single move won’t always make the major difference, especially if the cause of that move, in this case a dramatic policy shift, has a different, and possibly adverse effect on another position,” says Laurelli.

Still, one prominent multistrategy manager observes that macro funds posting low- to mid-digit returns in the quarter missed the boat. “They should be up more, but they’re not,” he says.

This manager, who requested anonymity, says that these days hedge fund managers in general are more risk-averse and worry about a sudden reversal in the market’s direction. He pins the blame on investors who in recent years have stood guard over monthly returns more closely and made a bigger deal out of them.

“Investors say they don’t want to see funds up 5 percent one month and down 5 percent another month,” this manager says. “They are holding managers back.”