Markets No Longer Make Sense to Macro ManagersBy
Macro hedge funds suffer their worst first-half since 2013
Andrew Law posts record losses of 10.4 percent this year
Financial markets no longer make sense to macro managers like Mark Spindel.
After spending three decades focusing on things like economic trends, currency moves, politics and policy, Spindel has been confounded by markets shaped by low volatility, algorithms and more. He finally gave up and closed his nine-year-old hedge fund.
“I felt the intensity of following markets at a time of increasing political and economic confusion very hard,” said Spindel, founder of Potomac River Capital in Washington. “My entire career had centered on an understanding of monetary politics and I had trouble getting my head around it all. It was exhausting.”
These are troubled -- and troubling -- times for macro managers, those figurative heirs of famed investor George Soros who were once dubbed the masters of the universe. They’ve barely made money this year and once again, their returns pale next to those of cheaper index funds. Many investors are looking elsewhere.
Andrew Law at Caxton Associates has posted record losses. Alan Howard had the worst first-half in his hedge fund’s history. Even the old hands in the business such as Louis Bacon haven’t been spared from losing money. And Soros’s son, Robert, conceded last month that his family firm has made fewer macro bets amid “lackluster” opportunities.
It’s enough to make a macro man wonder: in an age of untested central bank measures and algorithms, can this classic hedge fund style pay off like it used to?
The old guard made their fortunes when markets were more opaque, less efficient and when they had access to market information privy only to a few. Price trends were easier to latch onto, leverage heavily used and competitors fewer. Today, funds face an onslaught of technology that’s disseminating information more quickly and widely, while some algorithms are able to spot -- and capture -- price anomalies almost instantly. And computer models can more cheaply follow market trends.
Macro managers posted their worst first-half since 2013, losing on average of 0.8 percent after a 1 percent decline in June, according to Hedge Fund Research Inc. data. The managers returned less than 1 percent annually over the past five years. The broader hedge fund industry returned 3.7 percent in the first half after barely making any money last month, and returned about 4.9 percent annualized over the past five years, the research firm said.
After winning a brief reprieve at the end of 2016 in the wake of President Donald Trump’s election win, macro managers’ fortunes reversed this year as the dollar and oil declined, stocks rallied and a political crisis erupted in Brazil. Volatility in equity and currency markets also fell to their lowest in years. In recent weeks, though, the dollar and Treasury yields have risen amid a hawkish tone from developed-nation central banks.
Investors have lost patience with the strategy. They pulled about $3.8 billion from discretionary macro managers in the first quarter, the fifth straight quarterly outflow, while adding $4.9 billion into computer-driven macro funds, HFR data show.
For years, managers have blamed central bank policies for their failure to deliver stand-out profits. Low interest rates globally made it harder to make money from differences among nations, they say. And as computers probabilistically forecast economic and market data, some managers say it’s a challenge to compete with algorithms that can be a driver of short-term price action, and create shorter and sharper investment cycles.
Spindel, a former investment chief at a World Bank unit, is searching for answers to why macro didn’t work for him. Things started going awry for the 51-year-old just after Greece skirted Grexit two years ago. Spindel was wrong footed by China’s currency devaluations and Brexit -- at times trading from his couch at home during the night to keep abreast of political developments overseas.
Over a salad lunch during a visit to New York last month, Spindel recounted times when he got his economic forecasts right but market predictions wrong. He referred to charts that show a declining relationship between economic-data surprises and bond yields, and discussed how he was perplexed by new central bank measures.
“The dispassion felt harder in the Grexit-Brexit window,” Spindel said, whose fund generated an annualized 11 percent return from 2007 to July 2015. “Markets had become increasingly disconnected with economics and politics.”
In addition, increased regulation and fee pressure made it more expensive to run his $760 million firm, he said. After losing 12 percent through September last year, he returned money to clients.
Elephant in Room
“The elephant in the room is that macro should have done well in the past seven or so years because of all the political and economic events,” said Adam Duncan, a managing director at Cambridge Associates, a Boston-based firm that advises clients on investing. “Yet no one has made any money. The idea that the opportunity set hasn’t been there is just not true. Markets have been moving all over the place.”
For example, in the past two years the pound touched its lowest against the dollar in more than three decades, the Canadian dollar fell to its lowest since 2003 and gold dropped to a five-year low.
Managers need to increase risk and some should do more tactical trading, which is moving in and out of positions more frequently, Duncan said.
Some founders have had to rethink their business models, especially those who employ scores of managers that have been hamstrung by risk limits. They’ve cut their fees while some have stepped to the fore.
Howard, whose clients are fleeing his Brevan Howard Asset Management, delegated management of his firm in September to deputies so he can focus on markets, according to people who know him. And earlier this year, the no-nonsense, straight-talking billionaire turned to coach and U.S. chess champion Josh Waitzkin to help hone his trading skills, the people said. Waitzkin, who was the subject of the 1993 film “Searching for Bobby Fisher,” runs programs that involve practicing mindfulness and journaling, according to his website.
Brevan has lost 5.2 percent this year. A spokesman for the firm declined to comment.
Paul Tudor Jones, whose Tudor Investment Corp. has also seen clients defect, last year told investors that he will handle a greater chunk of their money and push his managers to take on more risk. His fund is down 2.5 percent this year through June. And Caxton, where Law already manages most of the firm’s money, told investors that it was shifting away from a strategy called momentum. The firm has slumped 10.4 percent through June.
While managers like Leland Lim in Hong Kong closed their macro funds this year, others including Law and Jones have anticipated the day when markets will make sense once again and they’ll make a comeback. Bacon, who runs Moore Capital Management, last year said he’s “exceedingly upbeat” for the first time in years about the “game-changing” trading opportunities following Trump’s election win. His fund fell 2 percent this year through June 22.
Representatives for the firms declined to comment while a spokeswoman at Caxton didn’t return messages seeking comment.
Despite the current malaise, there are some bright spots. A younger cohort of managers such as Jeff Talpins and Chris Rokos, who heavily rely on options for their trading, have garnered billions in new investments this year even as they haven’t made money, while macro funds that focus on emerging markets such as Glen Point Capital are outperforming.
Back in Washington, Spindel is upbeat. He’s managing his own money while putting the finishing touches to a book he’s co-written about the Federal Reserve that’s due to be published later this year. Spindel regularly rows on Washington’s Potomac River in a single scull rather than his former eight-man boat. One day he may return to managing other people’s money, he said.
“I would love to be back in an eight again.”
Below is a sampling of performance by macro funds, compiled by Bloomberg:
% YTD Return*
|Paul Brewer||Rubicon Global Fund||-27|
|Robert Citrone||Discovery Global Opportunity Fund||-11|
|Andrew Law||Caxton Global Investments||-10.4|
|Danny Yong||Dymon Asia Macro Fund||-8.2|
|Alan Howard||Brevan Howard Fund||-5.2|
|Jens-Peter Stein and Kornelius Klobucar||Stone Milliner||-3.4|
|Louis Moore Bacon||Moore Global Investment Fund||-2**|
|Paul Tudor Jones||BVI Global||-2.5|
|Ben Melkman||Light Sky Macro||flat^|
|Adam Levinson||Graticule Asia Macro Fund||+3.9|
|Anil Prasad||Silver Ridge||+8.3|
|Citadel team||Global Fixed Income Fund||+9.7|
|Robert Gibbins||Autonomy Global Macro Fund||+12|
|Neil Phillips and Jonathan Fayman||Glen Point Global Macro Fund||+17|
|Chris Rokos||Rokos Capital||-4.1***|
Source: Investors, Bloomberg News
*through June 30
**through June 22
***through May 31
^Since fund’s start in March
— With assistance by Katia Porzecanski, Klaus Wille, and Nishant Kumar