Macro funds miss out on trade of lifetime
In Moby-Dick, Capt Ahab obsessed over a whale. For fund managers that whale is quantitative easing
In Moby-Dick, Captain Ahab becomes obsessed with the whale that tore off his leg, chasing it through the seas until it eventually destroys him. For the word’s hedge fund managers, the whale is quantitative easing. Those who have obsessively bet against the central banks’ preferred stimulus measure have been battered. Some funds have not lived to tell the tale.
This week has only served to highlight how the hedge funds that specialise in predicting central bank moves have missed one of the biggest macro trades of all time: being long stocks and bonds since the financial crisis.
On Tuesday, the S&P 500 index enjoyed its biggest daily rebound in two months, adding to the confusion of a first quarter in which US share prices swung down and up by more than 10 per cent. Currency pairs have oscillated wildly, and commodity prices have confounded experts.
In this environment, macro hedge funds have struggled, unable to latch on to short-term market trends for long enough to make money from them — and frequently being washed out by bouts of severe volatility.
Their managers complain that central bank market manipulation has hampered their ability to distinguish between winning and losing trades. Very few have managed to make decent returns and some of their biggest clients — public pension plans — are voicing their disquiet.
But if, with perfect hindsight, macro funds had decided at the start of 2009 that central banks’ low interest rates would reflate risky assets, they would have bought up stocks and developed market government bonds. And, had they done so, their S&P 500 equity holdings would have made compounded annual returns of around 15 per cent with dividends reinvested. In reality, though, the average annual return from macro hedge funds, measured by the HFRI index, has been in the low single digits.
Macro fund managers will argue that they are not paid to engage in such trifles as buying up indices of stocks and bonds. They will argue they are not paid to be correlated to the wider market, and that any criticism fails to acknowledge the uncertainty over monetary policy since the crisis. However, none of this hides the fact that they have missed the biggest central bank-driven trade of their careers.