Macro hedge funds find 2021 is not scripted

Hedge Fund Updates

So far, 2021 has not gone quite as planned for macro hedge funds. They hope that a potential rise in inflation will soon begin to provide more attractive deals.

Macro funds, which bet on bonds, currencies and global equities, had a spectacular 2020. Falling bond yields, as central banks cut interest rates in response to the coronavirus and investors rushed to safe-haven stocks, provided dream trading. Then a huge rebound in stocks from late March offered another. Funds like Caxton Associates and Brevan Howard have had record years.

Many managers entered this year believing that the profits would come from what is known as reflation trading. Huge levels of government and central bank stimulus, along with a resurgence in global demand as lockdowns were lifted, were expected to drive inflation up, affecting government bonds. Funds could reverse their bets on Treasury bonds and position their portfolios for higher yields, which rise as bond prices fall.

Drawing a parallel to the 1920s following the Spanish Flu and WWI, Caxton Managing Director Andrew Law wrote to clients that “the scene may well be set for a big revival” and that ” the conditions are in place for it to work. until further notice”.

Andrew Law, chief of Caxton Associates, wrote to clients that “the stage may well be set for a big relaunch” © Paul Grover / Shutterstock

Headline inflation figures have started to beat expectations. But confusingly, 10-year Treasury yields fell from over 1.7% at the end of March to less than 1.2% last month, with investors betting the Federal Reserve would firmly control growth. consumer prices.

“It was frustrating given that they [macro funds] should be the most adept at judging changes in market sentiment, ”said Kier Boley, co-head of alternative investment solutions at UBP, who added that the technical buying of bonds meant funds had to hedge their bets on falling prices.

Brevan, Rokos, Caxton and Graham have been among the funds taking losses in recent months. Element Capital of Jeffrey Talpins, who arguably made one of the pandemic’s most premonitory investment calls late last year when he predicted the vaccine’s efficacy to be much higher than what the market would expect. expected, also went through a more difficult time after registering big gains last year.

To add to their frustration, the forex markets offered them next to nothing this year, having been almost put to sleep by the coordinated actions of central banks.

Macro funds grew on average 2.8% in the first eight months of the year, according to data group eVestment, far behind the hedge fund industry’s 9.5% average return.

Part of the problem is that macro funds tend to do well in bad news and market shocks. The financial crisis, the Italian bond crisis in 2018 and the coronavirus crisis provided some of their best deals.

But, in the meantime, the long periods of low volatility and rising markets often seen over the past decade have left them little to do. Quantitative Easing crushes the volatility of the bond market they like to bet on. Trying to analyze the economic impacts of QE can be downright confusing, as market movements may seem like little to do with macro fundamentals anyway.

Elliott Management, for example, one of the most respected companies in the hedge fund industry, recently wrote to its clients that they were “having great difficulty conceptualizing” what permanent quantitative easing could have on economic growth. and inflation. Odey founder Crispin Odey told clients “I only slowly realized” that his short selling was not working because all stocks are cheap compared to bonds.

In such QE-dominated markets, trading becomes about trying to generate small returns from tiny market inefficiencies, while hoping that the options managers hold against a crisis come true.

Luckily for them, markets could be choppy as inflationary pressures loom and central banks begin to tighten monetary policy.

This week, the Fed said a growing number of its officials expected interest rates to hike next year, while an announcement about cutting its massive asset purchase program from $ 120 billion a month seems likely in November. And the Bank of England has said inflation is expected to peak above 4%, strengthening the case for tightening. The OECD sharply increased its inflation forecasts.

Akshay Krishnan, head of macro and relative value strategies at Stenham Asset Management, sees “very negotiable opportunities” presenting themselves in bonds and currencies for macro funds.

“For next year, the rubber will hit the road on important issues regarding inflation whether or not transient and the extent to which various countries will reopen and economic activity will resume,” he said.

Markets have remained relaxed in recent months when it comes to inflation and tightening policies. If they turn out to have been too complacent, macro-funds may soon find that reflation trade is back.

[email protected]

About Christopher Easley

Check Also

Financial watchdog would have better access to SA firm documents under proposed law change

South Australia’s independent financial watchdog is said to have greater access to cabinet documents under …

Leave a Reply

Your email address will not be published.