Macro hedge funds enjoy unlikely renaissance
Market volatility caused by the pandemic has been a boon for investors making big economic bets
Three years ago, Hugh Hendry, one of the UK’s highest-profile hedge fund managers, called it quits. A career forged making bold bets on global economic trends was faltering badly, taking the fun out of it for the 48-year old — and his few remaining investors.
In a final letter to them in September 2017, before swapping London for the Caribbean, Mr Hendry blamed massive central bank stimulus for choking off the volatility craved by the “pirates” of global macro investing, a prominent hedge fund strategy that involves wagering on the fate of nations and governments through bonds, currencies and commodities.
“The business was becoming joyless, and it felt like an impossible task,” Mr Hendry admitted in an interview from his bolt-hole in St Barts. Surfing actual waves rather than economic ones was therefore more attractive.
But now volatility is back with a vengeance as the coronavirus crisis has engulfed the global economy. This has nurtured a renaissance for many macro hedge funds, with some notching up gains not seen since their 1990s heyday.
The main fund at Brevan Howard, the firm headed by billionaire Alan Howard, was up over 21 per cent in the first half of 2020; Paul Tudor Jones’s flagship fund at Tudor Investment Corporation has gained 8 per cent through July; and Chris Rokos’s Rokos Capital Management has climbed 24 per cent through to the end of July, according to investor documents and people familiar with the matter.
Caxton Associates has returned 31 per cent this year, according to investors, while a fund run by the firm’s chief executive Andrew Law is up 42 per cent. Meanwhile, Louis Bacon’s Moore Capital, which last year decided to eject the remaining external investors from its flagship funds after a long barren stretch, notched up a 25 per cent gain in seven months through July. The firms declined to comment on their returns.
Even Mr Hendry has felt himself sucked back in, dusting off his Bloomberg terminal and in May placing a bet on the gold price marching higher — once again a popular trade among macro hedge funds. “I’m back in the game, but I have no lust nor desire to manage money,” the retired investor stressed.
Soros Fund Management, the hedge fund still best known for “breaking” the Bank of England with its 1992 bet against the pound, has also tentatively returned to its roots. Although Dawn Fitzpatrick has gradually pulled money from the strategy since taking over as chief investment officer in 2017, this year she allocated some money to an outside global macro fund for the first time.
What no one disputes is that macro managers were in urgent need of the revival, given the exodus of investors many have suffered. “It was a frustrating time,” said the head of one global macro fund.
At London-based Brevan Howard, one of the industry’s best-known firms, assets collapsed from about $40bn in 2013 to $6bn, prompting speculation it could return money to investors.
“It was obvious that the returns being produced in our flagship fund at that time were not keeping our investors happy,” Aron Landy, its chief executive, said in an interview. “We knew that had to change.”
But he stressed that closing down or converting the firm into a family office to manage Mr Howard’s wealth was not an option. “It was never on the agenda,” Mr Landy said. “We always believed in ourselves,” adding that the firm reckoned its managers “would produce returns over time, especially when the market conditions were more favourable”.
If there is relief over the resurrection of macro investing, there is little consensus over whether it can last. Ms Fitzpatrick of Soros Fund Management is more sceptical.
The market environment that made the strategy profitable in the past — sparser and slower financial information, riskier economic policymaking and less efficient markets — was not coming back, she argued.
“Investing is about having an edge, and there’s no asset class it’s harder to have it in than large, liquid macroeconomic markets,” she said. “The degree of difficulty in discretionary macro is high.”
Dave Fishwick, the manager of a macro hedge fund at UK asset manager M&G, agreed. Recalling how he used to have to wait for German economic data releases to arrive by physical mail back in the 1980s, he said: “I think it’s incredibly hard to argue [you have] informational edge in a world where everyone else has all the same information.”
Just as a handful of major tech companies have powered US stocks to a new record high this week, the renaissance of global macro funds may also be overstated by the strong performance of a few behemoths.
While Tudor, Moore, Brevan Howard and Caxton have delivered so far in 2020, the flagship “Pure Alpha” fund at Bridgewater was down almost 14 per cent for the year through June, according to people familiar with the matter. The average global macro fund is flat this year, according to data from Aurum Fund Management, a firm that invests in hedge funds.
Although that compares with an average decline of 2.8 per cent for the hedge fund industry this year, it is disappointing from an investment style that built its reputation on being able to benefit from economic and political turbulence. By comparison, global equities are flat on the year, while Bloomberg’s broadest bond index has returned 5.2 per cent.
“There are some really good macro investors out there, and this environment is better than it’s been in a while, but I would caution against believing that every global macro fund is doing well,” Ms Fitzpatrick added.
Ms Fitzpatrick reckoned that global macro accounted for about a tenth of the hedge fund industry’s assets a decade ago, but that had now slipped to 6 per cent. Aurum estimated the combined assets under management of the 196 macro funds it tracked was $161bn at the end of June. This diminished heft had compounded the strategy’s problems, she argued.
“All the best macro hedge funds were great aggregators of information. They then come up with a non-consensus thesis, put on a position and become great storytellers. And then a huge wave of money would follow them,” said Ms Fitzpatrick. “But as capital has shifted into passive or systematic strategies, that has also dampened the opportunities.”
The money Soros recently allocated to another global macro fund is therefore to one that blends the strategy’s traditional “discretionary” approach with a more computer-driven, quantitative one. Ms Fitzpatrick declined to name it, but people familiar with the matter said it was Symmetry, a $5bn Asia-focused hedge fund.
Not everyone believed that the opportunities would quickly fizzle, given the severity of the pandemic and the multitude of likely aftershocks.
The head of one macro fund said that, after “some spectacular market moves” earlier this year, there was still money to be made, for instance, in inflation-protected Treasuries. “You don’t need to make apocalyptic forecasts about inflation to make money on inflation,” the manager said, as even modest price changes could cause market ructions.
But Mr Hendry, for one, was sceptical that this was anything but a last hurrah. He argued that central banks had gone from “volatility machines” to hyperactive suppressors of economic and financial turbulence.
“If volatility continues to go higher then it would lead to a renaissance,” he lamented. “If not, then this is just a brief respite in the long, slow boring death of global macro.”