Hedge Fund Pivot Joins BTG to Defy Bacon’s Investment Desert
Carl George’s $1.7 billion hedge fund at Pivot Capital Management Ltd. rose 17 percent in 2011 after he predicted a surprise interest rate cut in Brazil.
He gained another 6 percent in the first eight months of this year after betting Australian policy makers would lower rates to stimulate their economy, said investors in the fund, who asked not to be identified because the returns are private.
The winning streak puts his Monaco-based firm in a select group: Macro hedge funds that have consistently made money since the start of 2011. Over that period, most of the traders who investors pay the most to profit from global economic trends have been confounded by Europe’s debt crisis and uncertainty over how a slowdown in China would affect growth. Macro firms on average have posted losses amid markets Moore Capital Management LLC founder Louis Bacon says resemble an “investment desert.”
“Unless you’ve had the ability to move quickly and really dial up the risk and build positions, it’s been tough,” said Andrew McCaffery, who oversees $4.5 billion in hedge funds at Aberdeen Asset Management Plc in London. “Those who have done well will have the opportunity to take on assets.”
In addition to Pivot, macro firms managing more than $1 billion that have beaten investments in stocks and bonds since the beginning of last year include the BTG Pactual (BBTG11) Global Emerging Markets & Macro Fund and the Autonomy Global Macro Fund. Pivot profited from its bearish view on China by betting on rate cuts in Latin America, a region where Autonomy has made most of its money this year.
The $3 billion BTG Pactual fund surged 17 percent this year through August with gains coming from bets on emerging-market interest rates and holdings of U.S. mortgage securities, which rallied as the housing market rebounded and the Federal Reserve pushed investors into riskier assets by holding rates near zero. The fund, led by former UBS AG fixed-income trader Antoine Estier in London and former Barclays Plc mortgage trader David Martin in New York, gained 3.4 percent last year, according to a letter sent to investors this month.
Autonomy Capital Research LLP, which manages about $2.8 billion, saw its macro fund climb 10 percent through August, boosted by trades on Latin American rates. The fund rose 14 percent in 2011, according to investors.
Chief Investment Officer Robert Gibbins, a former Lehman Brothers Holdings Inc. trader who has led Autonomy to a 15 percent average annual return since founding the firm in 2003, has been skeptical of whether China can transition from an economy spurred by investment to one driven by consumption.
Autonomy told its clients last month that the world’s second-biggest economy may be due for a “harder landing than some had expected.” If that happens, the countries most hurt would include Brazil, Chile and Australia, which have benefited from China’s “voracious appetite for commodities,” the New York-based hedge fund wrote in a letter to investors.
Pivot’s George declined to comment, as did spokesmen for BTG Pactual and Autonomy.
The performance of the three funds -- even after the 20 percent fee they charge on investment gains -- exceeds the 14 percent return since the end of 2010 for the Vanguard Balanced Index Fund (VBINX), which tracks a mix of stocks and bonds. For other macro firms, including some of the biggest with the best track records, it’s been a different story. The funds on average have lost 8 percent of investors’ money over the past 20 months, according to data compiled by Bloomberg.
The muted performance of macro funds was underscored by Bacon’s August decision to give back $2 billion, or 25 percent, of client money in the main hedge fund he oversees at Moore. He made the announcement after the $8 billion Moore Global Investments fund rose 1.6 percent in the first seven months of the year and declined 2.2 percent in 2011. Bacon said he wanted the fund to be more nimble, due to concerns that size was preventing it from making money, according to a letter to investors last month.
Bacon, 56, complained that European policy makers had fallen into a pattern of making positive announcements that temporarily pacified markets without resolving the fiscal concerns weighing on Spain, Italy and Greece. The environment is much the same in the U.S., where “artificially induced consumption” prompts temporary buying before over-indebted households “quickly draw back into their shells at the first sign of danger,” he wrote.
“The result has been short start-stop-start growth cycles,” said Bacon, whose New York-based firm oversees $15 billion. For hedge funds, “idiosyncratic opportunities, particularly in liquid markets where volume can be exploited, are becoming an oases in an investment desert.”
Shawn Pattison, a Moore spokesman, declined to comment.
Others have also struggled. The main macro fund at New York-based Caxton Associates LP, which manages $10 billion, lost about 1 percent this year through Sept. 21 after gaining 0.7 percent in 2011, according to investors. London-based Comac Capital LLP’s $4.9 billion macro fund declined 5.5 percent in the first eight months of 2012 after rising 5 percent last year. The $9 billion macro fund at Paul Jones’s Greenwich, Connecticut-based Tudor Investment Corp. rose about 4.7 percent through Sept. 14 after gaining 2.2 percent in 2011, clients said. Officials at the hedge funds declined to comment.
The trading environment is “the worst” for macro funds because hard-to-predict political decisions are driving markets, said Luke Ellis, chief executive officer of Man Group Plc (EMG)’s FRM unit, which has $19.5 billion invested in hedge funds. Macro funds performed better when they had an information edge based on close ties to central banks and there was more disparity on monetary policy, Ellis said at a Sept. 25 London press briefing.
“The glory days of macro were back when we had a series of central banks acting very differently than each other and where you could get inside knowledge of what the central bank was up to,” said Ellis, adding that FRM is “very underweight” investments in macro funds. “If you went back to the 1990s, it was pretty easy to have a call in to somebody in the central bank who would tell you what they were thinking. Today, that’s just not remotely possible.”
While Bacon said he thinks his fund is too large to produce good returns, being big has actually provided a slight advantage since the start of 2011.
Macro firms managing more than $1 billion gained 2.8 percent on average during the first eight months of the year after losing 1.2 percent for all of 2011, according to data provider Evestment Alliance. Funds overseeing less than $1 billion rose 1.1 percent on average through August after losing 3.1 percent in 2011. Atlanta-based Evestment tracks the performance of 36 big macro funds and 214 smaller firms.
“Smaller managers have the advantage of being able to trade their portfolios more tactically and invest in markets that don’t have the necessary volume for larger ones,” said Javier Uribarren, director of investment at Stenham Asset Management Inc. in London, which has about $2.4 billion in hedge funds. “On the other hand, bigger funds can benefit from a larger infrastructure and better access to information.”
Macro funds trade in global equity, bond, currency and commodities markets. The strategy is known for trades such as the $1 billion that George Soros made in 1992 betting against the British pound and the 18 percent average annual gain Bacon has produced dating back to 1989.
Client investments and performance have increased macro fund assets by $88 billion to $172.5 billion over the past four years, according to data from Fairfield, Iowa-based BarclayHedge Ltd. Only managed futures funds, which use mathematical algorithms to decide when to buy or sell assets, have been more popular during the same period.
Investors poured money into macro funds based on a view that they would be the best at navigating markets dominated by macroeconomic themes and because the firms made money on average during the 2008 global financial crisis when the rest of the industry suffered its worst year.
The confidence proved wrong. Of the 23 hedge fund strategies tracked by Chicago-based Hedge Fund Research Inc., 19 have done better than the 2.2 percent return made by macro funds over the past 36 months.
Bacon said traders have been plagued by political intervention and “trendless volatility.” Hedge funds that have done well are being tested by curveballs thrown at them by policy makers.
European Central Bank Chairman Mario Draghi sparked a rally on July 26 by saying he would do “whatever it takes” to save the euro, a pledge that translated six weeks later into his announcement that the ECB would buy government bonds to make borrowing costs more sustainable for indebted countries.
On Sept. 13, U.S. Fed Chairman Ben S. Bernanke said the central bank would commence its third round of asset purchases since the collapse of Lehman in 2008. The Fed will buy $40 billion of mortgage securities every month in an effort to create jobs after U.S. unemployment stayed above 8 percent for almost four years.
The interventions have triggered mixed results for macro hedge funds.
George’s Pivot Global Value Fund has been expecting a global slowdown since 2010, especially for export-driven economies reliant on selling goods to China, according to its investment letters.
The fund made money over the past 20 months by buying cheap options that led to profits when countries that other investors were bullish on cut interest rates. The strategy is based on George’s stance that the China boom is unsustainable and then finding inexpensive ways to express that view, investors say.
It worked when he predicted Brazilian policy makers would cut rates in August 2011 after raising them five times earlier in the year. George, who joined Pivot in 2003 from investment firm Sovereign Asset Management Ltd., also made money in the early part of this year after three Australian rate cuts.
Pivot, which has increased its assets by about $1 billion over the past year, then posted a 1.1 percent decline in August. It has had further losses this month as the stimulus provided by the ECB and Fed gave other central banks breathing room to avoid further loosening of monetary policy, investors said. The Pivot fund has produced an average annual gain of 17 percent since inception in 2002, according to data compiled by Bloomberg.
BTG Pactual has continued its good run based on a mantra of “don’t fight the central banks” that the hedge fund discussed in a letter sent to investors this month. While heavy sales of bonds and the risk of negative news would normally call for “defensive” positioning, low yields and “unprecedented” stimulus will drive investors to riskier assets, the firm said.
The BTG Pactual fund rose 1.6 percent in August with gains coming from holdings including U.S. mortgage securities, Brazilian consumer stocks and even Greek bonds, according to the letter. The fund’s managers, who plan to stop accepting money from clients once assets hit $3.5 billion, said they have been “moving further down the credit, and to some extent liquidity, spectrum” in pursuit of returns. The BTG Pactual fund began trading in February 2009 and rose 58 percent that year. It gained 22 percent in 2010.
London-based Brevan Howard Asset Management LLP’s $26 billion Master Fund, the biggest macro hedge fund in Europe, has also posted gains since Draghi’s July pledge, and is up about 1.9 percent in 2012 after struggling for much of the year, according to investors. Through June, the Master Fund lost 3.6 percent. It gained 12 percent in 2011.
The managers of BlueBay Asset Management Ltd.’s $1.2 billion macro fund, which had beaten rivals by gaining 4.2 percent through August after rising 6.7 percent last year, said in a letter to clients that ECB bond-buying means investors should be cautious in betting against Europe. Officials at the London-based firm declined to comment.
“Markets need to acknowledge that the proverbial goal posts have moved,” portfolio managers Neil Phillips and Jonathan Fayman wrote in a letter to investors last month. “It is now conceivable that European bond markets remain stable for much longer than the fundamentals justify.”
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