Finance & economics | Hedge funds

Macrobatics

To make money, macro hedge funds must be nimble

|NEW YORK

A WILDERNESS of mirrors is how Hugh Hendry of Eclectica Asset Management, a macro hedge fund, has described the uncertain investment landscape, quoting a poem by T.S. Eliot. For macro hedge funds, which bet on global economic trends by trading instruments of almost any description, the terrain is especially perplexing. They are confronted by sovereign defaults in Europe, China's boom, the risk of a double dip and state intervention in markets, not least quantitative easing in America.

Managers grumble that there was a lack of clear trends to follow in 2010. Those that did emerge often quickly went into reverse, leaving macro funds, which usually invest in longer-term themes, flummoxed. Average returns were modest—about 8% last year, less than the typical hedge fund (see chart). Some celebrated names lagged behind. Brevan Howard returned only about 1%. In August Stanley Druckenmiller, a protégé of George Soros, king of the macro world, said he would close his fund, Duquesne Capital Management, because he was not pleased with his performance.

Some managers were able to stand out. Those that took long positions in equities and commodities did particularly well. Passport Capital, a $4.2 billion macro hedge fund based in San Francisco, rose 18% last year, partly because it piled more than half its assets into commodity-related equities, such as Riversdale, an Australian mining company. Bridgewater, a large macro fund, gained nearly 45%, aided by its bets on gold and American and European bonds. Autonomy Capital was up 26%, partly because it shorted the euro and European credit and went long on various Asian currencies. Owning commodity currencies, such as the Canadian dollar, also proved lucrative for some funds.

Managers have started 2011 with a few new-year resolutions. Many plan to stomach more risk. Last year also showed the importance of being quick at entering and exiting trades. Typically macro funds build their positions slowly. However, “In last year's choppy market, trades had a shorter lifespan,” says Tomas Jelf of Prologue Capital, a London-based macro fund. “You had to go in closer to the full size early on and then be willing to take it off quicker. You had to be tactically more aggressive.”

Despite tepid performance in 2010 investors have remained enthusiastic about macro funds. They are liquid and diverse, since they trade in many asset classes, and received around $9.5 billion in investor allocations in the first 11 months of last year, according to BarclayHedge, a data firm. That made macro funds one of the most popular types of hedge fund. Investors are fans “because there's still a nervousness about the future”, says Michael Novogratz, a principal of Fortress, an investment firm. “Investors see macro as a hedge to the world shifting,” reckons Mr Novogratz, who oversees his firm's macro funds.

That enthusiasm means other kinds of hedge fund are busy buffing up their expertise in macro. Steven Drobny of Drobny Global Advisors, a research and strategy firm for macro funds, says he is seeing a surge in firms venturing into the area for the first time—or what he calls “macro-tourists”.

This article appeared in the Finance & economics section of the print edition under the headline "Macrobatics"

America's blame game

From the January 15th 2011 edition

Discover stories from this section and more in the list of contents

Explore the edition

Discover more

How China, Russia and Iran are forging closer ties

Assessing the economic threat posed by the anti-Western axis

How NIMBYs increase carbon emissions

Opposition to new buildings has unfortunate consequences


The private-equity industry has a cash problem

Little wonder its investors are protesting