Hedge funds build macro firepower to capitalise on volatile markets
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Hedge funds are building their firepower in global macro trading as they seek to capitalise on the most lucrative environment since the financial crisis.
Macro trading, a decades-old strategy made famous by the likes of George Soros and Louis Bacon, involves betting on moves in global bond, currency and other assets.
After years of dull returns in markets dominated by central bank stimulus, the sector has been turbocharged by sharp cuts in interest rates during the coronavirus pandemic and then the return of high inflation and steep rate rises as economies opened up.
US-based Schonfeld, Graham Capital and ExodusPoint are among firms hiring in this space. Managers are preparing for an expected influx of capital from investors searching for ways to protect their portfolios in an environment of choppy markets and diminishing support from central banks.
“There’s been a paradigm shift in interest in macro from the previous decade to now, due in large part to central bank activity,” said Kenneth Tropin, chair of $17.5bn-in-assets Graham Capital, which he founded in 1994.
“Macro markets have been moving like crazy, last year was particularly good and the opportunity set is fantastic looking ahead,” he added. The Connecticut-based firm has recently hired an economist and a macro fund manager and is looking to add more investment professionals.
In February the Financial Times revealed that multi-strategy hedge fund Schonfeld was hiring Bahamas-based macro manager Ben Melkman, a former star trader at Brevan Howard who until last year was running Light Sky Macro. Schonfeld — which about two years ago began building its presence in discretionary, or human-led, macro trading — plans to hire aggressively in this space, as it diversifies further into the area.
Last month ExodusPoint Capital, which manages $13bn in assets, hired London-based Patrik Olsson, former chief investment officer at Nektar Asset Management, to run a macro strategy. New York-based MKP Capital has been expanding staff numbers as it tries to capitalise on what it believes is a “structural shift” in markets. And London-based Trium Capital launched a macro fund late last year, with the ending of quantitative easing heralding “a rich era for global macro”, according to co-chief executive Donald Pepper.
Demand for macro traders is “exceptionally high, both in quant and discretionary”, said one hedge fund recruiter.
One of the oldest hedge fund strategies, macro hedge funds struggled for years as trillions of dollars of central bank stimulus suppressed market volatility and pushed interest rates to near zero, limiting their ability to profit.
But they have largely enjoyed a revival since the start of the pandemic, with many such as Caxton Associates and Brevan Howard profiting handsomely as interest rates were slashed in 2020 in a bid to revive economic growth.
And while some funds, notably Rokos Capital and Odey, were hard hit by major bond market upheaval in autumn of 2021, last year was the strongest for macro funds since the onset of the financial crisis in 2007.
Funds on average gained 9 per cent last year, helped by soaring bond yields and a strengthening dollar, compared with a 17.7 per cent fall in the S&P 500 in total return terms and large losses suffered by many equity managers.
Among the biggest macro winners were Ken Griffin’s Citadel, which made 32.6 per cent in its fixed-income and macro fund, its best ever annual return, and Caxton Associates, whose Macro fund run by chief executive Andrew Law gained 35 per cent.
And Rokos, which gained more than 50 per cent and is up a further 6.5 per cent already this year, has opened up to new money and is looking to grow its $15.5bn in assets by approximately $3bn as it aims to capitalise on the attractive trading opportunities.
The large shifts in bond and currency markets have also provided a lucrative environment for computer-driven funds betting on such trends in global markets. Man Group, one of the world’s biggest hedge fund firms, reported last week that most of its $779mn of 2022 performance fees were earned on its systematic macro funds.
“Macro dispersion is coming from central banks and governments, which creates opportunities for [quant trading arm] AHL,” chief executive Luke Ellis said, referring to large moves in global markets.
US investment firm Dynamic Beta’s DBMF fund gained 23.5 per cent last year and the firm’s assets more than tripled to about $2.2bn. Markets are no longer constrained by central banks, meaning the trends that such funds thrive on are likely to be around for years, said Paul Britton, chief executive of $8.6bn-in-assets Capstone, which has made hires in trend-following and currency trading.
Despite the strong returns, macro funds have suffered four straight years of investor outflows, according to data group eVestment. That is likely to have been driven by investors trimming their allocations in response to years of lacklustre returns, while last year some investors trimmed macro allocations that had grown too large in their portfolios relative to stocks and bonds, both of which fell sharply in price.
However, many believe that macro is likely to continue to be the big winner in the current market environment.
“We see a need for macro in all of our portfolios,” said John Sedlack III, senior investment manager, alternatives at Abrdn. “Higher interest rates correspond with better returns for macro.”
And in a recent survey of investors managing $1.4tn in assets, BNP Paribas found that macro was the best performing strategy last year, and is now one of the most popular to allocate to.
“Investors are particularly focused on the paradigm shift and what’s happening in rates and inflation,” said Marlin Naidoo, global head of capital introduction at the bank. “Macro is very well positioned to take advantage of that.”