It’s been an abysmal year so far for macro funds. Brevan Howard and Tudor – two of the doughtiest names in the business, both possessed of formidable track records, long investor lockups, and huge market power and access to information both suffered big drawdowns and redemptions. I sat in my sell side seat watching/helping both of them load up for the March ECB meeting and see it come to nothing. Sure enough, in the months to follow, requests from many of the PM’s at those funds that I cover dried up and then stories started hitting the wires about investor redemptions. Rokos Global Macro Fund – and its eponymous founder of former Brevan fame, have had a rubbish start – down about 3% as far as I can tell in H2 15, and down another 2 or 3 now. As far as I can see, about $2bio has been pulled from Tudor and Brevan. Rokos’ investors are all on really long lockups, but a few more months of this and one can imagine they too will start to get jittery. I can say with confidence that only two of my customers made money in 2016 – and neither are A players, they’re just really smart/lucky (or well advised perhaps!)
Why has this happened? Well – it’s important I think to understand what these “Macro Funds” really are. It’s confusing because lots of things call themselves macro funds – but Macro investing is about understanding how politics and finance interact with market conditions to create opportunities to take risk and gain outsize returns. Once he’s latched on to a theme that works, a Hedge Fund manager will “Pyramid” into a position – using the positive mark to market of his portfolio as a counterweight to swing a bigger and bigger line. Here are some examples of macro trading done right. And wrong. It’s a style of trading that typically requires quite a bit of self belief. There’s no reliance on systems – except one’s own systems of thinking. However, just because everyone is doing his own thinking doesn’t mean they don’t all end up acting in predictable ways. All these accomplished men (and it is, to be fair, exclusively men in my experience) end up profiting from the same kinds of scenarios – and it’s quite simple to understand when they will and won’t make money. Basically, Macro Funds profit from regime shifts. Market volatility, ie, lots of movement in prices, is not enough. It has to be the kind of movement that comes from unanticipated new information or events – ie – the kind of thing that contrarian thinking and fundamental analysis could potentially have spotted.
2016 has not delivered any such shifts. The market went into it expecting an anemic Fed hiking cycle, and Chinese devaluation. Both of those have been delivered. In fact, the Chinese devaluation example is perhaps the best exemplar of why macro funds have underperformed. If you were thinking about it, Chinese capital outflows from an overheated domestic economy with a high enforced savings rate were inevitable, that combined with excessive leverage made the Yuan a great short. However, that was just as visible to Chinese policy makers as market participants – enabling a so far orderly devaluation against a basket of world currencies, with periodic assaults on those short the Yuan vs USD by the PBOC . Almost every macro manager I knew was in the trade in some form. Those in first and out first made a bit of money. The rest scratched the trade or even lost a bit. The pyramiding habit of Macro funds, so advantageous in genuine regime shifts, killed them on the Yuan trade.
Perhaps most gallingly for macro managers – the environment has been ripe for outsize returns by their direct competition – the passive alpha generators. On this side of the market, we have the Quant funds, the model CTA’s and the Arbs. All of this crew – who in one form or another use analysis of market data to generate trade ideas – are effectively just short vol of vol – regime shifts will blow up their models and kill their returns. However, with global markets going nowhere fast, they’re eating the discretionary crowd’s lunch. Obviously I have a dog in this fight given the work I do and I hope things change – but really we all should – because ultimately, this kind of alpha generation is a tax on the financial world and doesn’t contribute to better allocation of capital. It’s rent seeking behavior pure and simple. Macro funds aren’t immune to such behaviour (vis a vis leveraged carry trades) – but at least they profit by being right and forcing change in the world rather than simply leeching $ out of the marketplace through clever application of statistics. I hope we get some excitement so the discretionary camp can come out swinging in H2 this year!