Tudor's Existential Moment

When no one seems to know where markets and economies are heading, does the strategy even make sense?

In general, the hedge-fund industry is starting to stabilize after more than a year of severe withdrawals. But there's one significant exception: For a handful of large macro funds, the pain continues.

These strategies -- which bet on broad economic and market trends -- reported $3.4 billion of withdrawals last month, the most of any hedge-fund type, according to a Sept. 21 report from eVestment. 

Among those feeling the heat is Paul Tudor Jones's Tudor Investment Corp., one of the oldest and most expensive hedge-fund firms. After suffering more than $2 billion of investor withdrawals this year, it has cut 15 percent of its staff, including the closure of its Singapore trading desk, and lowered fees to retain clients, according to Bloomberg News reports.

On one level, this isn't surprising given the fact that Tudor's macro funds have lost value this year, despite bonds and stocks both posting substantial rallies.

Down Time

Tudor's macro hedge funds have disappointed investors, posting losses this year

Source: HSBC Alternative Investment Group

As a whole, macro funds reported average gains that were significantly lower than returns on broad indexes of stocks and bonds, making it hard to justify the higher fees charged more broadly throughout the hedge-fund universe.

The Laggards

Macro hedge funds have generally underperformed stocks and bonds this year on a total return basis

Source: HFR, S&P 500 index, Bank of America Merrill Lynch index data

But the problems within macro hedge funds go beyond just near-term performance. 

It's getting harder to read economic tea leaves and determine the future path of markets. Some of the traditional gauges of market stress are increasingly dismissed as irrelevant or less accurate in an era of central-bank interference and new banking regulations.

Most analysts expected the Federal Reserve to raise rates at least once this year, which probably would have caused the dollar to strengthen, but U.S. central bankers can't quite get a handle on whether the world's biggest economy is accelerating or decelerating. So it's almost October and still no rate hike, and the dollar has weakened against its peers.

What Strength?

The U.S. dollar has weakened versus its peers this year, despite expectations that it would strengthen

Source: Bloomberg

The Bloomberg Dollar Spot Index tracks the performance of a basket of ten leading global currencies versus the U.S. Dollar.

Meanwhile, the Japanese yen has strengthened despite increasing stimulus efforts by the nation's central bank: 


The yen has strengthened this year against the dollar despite the BOJ's expanded stimulus efforts

Source: Bloomberg

And even though foreign investors are selling U.S. Treasuries at the steadiest pace on record, yields continue to drop. This is all very confusing. And it has led to a lot of wrong calls by fund managers who are trying to figure it all out.

"Within the macro universe, performance is a symptom of a manager’s ability to interpret the major market forces in the world," said Peter Laurelli, global head of research at eVestment, in an email message. "Underperformance means that in the near term, a generally poor job has been done at estimating the consequences, or significance of global themes."

Tudor makes for a good poster child, but it's not alone. Brevan Howard endured a string of withdrawals that have whittled its assets down to about $19.4 billion from $42 billion two years earlier. On Monday, the Wall Street Journal reported that Brevan Howard cut management fees to nothing at its flagship fund for some investors. Last year, poor performance forced Fortress to shutter a $2 billion macro hedge fund. 

Add to that a generally less-flexible market, where many investors are all crowded into the same ideas, and more electronic traders who are trying to profit from any discrepancies between asset classes, and it's getting harder to distinguish oneself using older investment models. 

In addition to trimming its staff, Tudor is responding by hiring quantitative analysts and academics to better analyze big data and get an edge on interpreting the world. Founder Paul Tudor Jones has also taken on more money to manage himself.

For the fund managers like Jones who were once lionized as the financial titans of our era, these changes may or may not be enough to stave off the existential threat posed by an environment in which no one seems to know exactly where markets are heading. Either way, it'll be hard to convince investors that much has changed until they see results. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at labramowicz@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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