While nearly all strategies are down this year in HFR’s aggregated indices, the HFRI Macro Index is up year-to-date by 6.76%, and the Macro Systematic Diversified Index is up more than 12%. In 2007, the indices returned 11% and 10% respectively.
Good performance looks set to continue. The bear economy will persist, say managers, and that means interesting trading opportunities for skilled macro managers. "The 2004-07 market environment was difficult for macro," says Kevin Harrington, managing director at macro fund Clarium Capital Management. "Petrodollar recycling drove unusual liquidity distortions that caused traditional macro relationships to break down. The higher oil prices went, the larger the petrodollar liquidity distortions grew, narrowing credit spreads and lowering real interest rates even as underlying damage to the economy from the energy shock was intensifying. When that damage became severe enough to pop the credit bubble, and the dollar weakened enough to start shrinking the US current account deficit, the trend toward unusually low credit spreads and risk premia reversed. We see the dollar trending lower still, and are bearish for some years yet. Risk premia will continue to rise until the US current account deficit approaches zero,"
Despite overall macro industry outflows, Harrington says Clarium has seen a lot of investor interest. Appetite for macro strategies was also seen in the success of macro specialist Brevan Howard’s IPO of a feeder fund in May. BH Global raised $1 billion in the IPO, when only $500 million had been expected. The listed vehicle feeds into Brevan Howard’s Global Opportunities Master Fund, which can invest in all of the firm’s funds. Its master fund, a global macro/relative value fund with more than $18.5 billion in assets, returned 25.21% in 2007, and was up 14.19% by the end of the first quarter of 2008.
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Macro funds cycle back |
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Returns of macro index versus overall index |
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Source: Hedge Fund Research |
Inflows into macro strategies, however, have not been across the board. In the first quarter of 2008, outflows of $920 million were recorded for macro funds in HFR’s universe. Yet $8 billion was put into long/short funds, despite losses of almost 6% that quarter.
Where outflows might be registered are among small macro funds, or indeed as a result of the closure of some smaller macro funds. Between 2004 and the beginning of 2007, macro was not a popular strategy to run. "Some smaller funds tried to start up in 2006 ready for the bear market that was coming but they were unable to gain scale or sufficient track record to make it work. Perhaps it is these funds that are now seeing outflows," says a New York-based fund of hedge funds CIO.
Harrington points to high barriers to entry for macro funds, and finding skilled employees is difficult. "Central banks are one potential source for hiring. Their ex-staffers can make calls on interest rates and currencies but tend to have conventional viewpoints. Prop desk traders are another potential source for macro funds but their expertise is in trading, not analysis. One could hire people with CTA backgrounds, but they have a very different trading style and the cultural fit with macro is poor. So we have tried to get people from non-traditional backgrounds who show aptitude at solving macro problems."
A fund of funds manager says no credible new macro funds have been set up over the past year. "I expect that as the opportunity set continues to improve for macro funds, the well-established players will be the beneficiaries."