December 3, 2015 / 10:22 AM / 4 years ago

Hedge fund investors keep the faith in macro bet

LONDON/NEW YORK (Reuters) - A weak overall performance for hedge funds which bet on macroeconomic trends this year has not stopped some investors from gearing up to trust them with their money in 2016.

While returns across hedge funds are flat, many so-called macro funds - which make up around a fifth of the industry’s $3 trillion in assets - have fared worse, caught out in some cases by sharp market moves that wiped out profitable trends.

This has meant the closure of 113 macro hedge funds in 2015, data from industry tracker Eurekahedge showed, although 82 new ones opened, many of which take the view that an eventual divergence in developed market interest rates and increased volatility will boost returns.

Net investor flows into macro funds were $2.03 billion in October, data from industry tracker eVestment showed, to take year-to-date inflows to $10.71 billion. However, $3.61 billion had exited in September after a weak August performance.

Notable closures were the main macro fund at Fortress Investment Group, a $1 billion fund at the world’s biggest asset manager, BlackRock, and Bain Capital’s $2.2 billion ARC fund.

But in the second half of the year several of the biggest fund launches have been for macro hedge funds, including by ex-Brevan Howard star trader Chris Rokos, who is managing more than $1 billion.

The average computer-based “systematic” macro fund was down 2.6 percent in the year to end-October, while “discretionary” managers who invested manually were up just over 1 percent, data from industry tracker HFR showed.

“If you had described the environment (at the start of the year) and asked people what they expected macro to do, I think people would have said ‘quite well’,” said Sam Diedrich, sector specialist at hedge fund investor Paamco.

“The drivers for macro returns are really (the) ability to capture the trends that exist, so it’s hard to predict that going forward, but a lot of the drivers that would seem very positive are setting up for this year again.”

A recovering U.S. economy and expectations for a rate rise had made the dollar a buy and emerging markets a sell for many in the market for most of the year, while monetary easing was expected to support European and Japanese stocks - all proved true and all have returned around or over 10 percent so far.

Few played it so simply, however, and macro managers who lagged did so for a number of reasons.

A focus on the “very dull” government debt of the three biggest economies had hurt some, said Michele Gesualdi, chief investment officer at Kairos Investment Partners, as quantitative easing kept rates low and the U.S. Federal Reserve kept putting off its first rate rise for almost a decade.

Shock moves such as China’s currency devaluation hit others, said Rob Christian, Head of Investment Research at fund of hedge fund firm K2 Advisors, while Man Group President Luke Ellis said yet more had lost money by failing to understand the new risk profile of banks as a result of regulatory changes, which had sent dollar swap rates negative.


Among the worst-hit funds this year was the $1.6 billion Fortress Macro Fund, down 17.5 percent in the year to end-September and the $47 million Eagle Directional Macro Fund, down 11 percent to Nov. 13, performance data seen by Reuters showed.

Not all lagged, though, with standout performances including a near-15 percent gain in the year to end-September for Jeffrey Talpins’ $5.9 billion Element Capital Fund and an estimated 11 percent gain for the $561 million Gavea Fund, data showed.

In spite of the poor average return, many investors are likely to stick with the strategy amid an expectation that the Fed will finally move to raise interest rates this month and create fresh opportunities for macro managers to profit.

Speaking at a recent Reuters Investment Summit in New York, Erin Browne, portfolio manager at billionaire Steven Cohen’s $11 billion family office, Point72 Asset Management, said the pace of future tightening would be crucial.

Kairos’ Gesualdi, meanwhile, said increased volatility could also help.

“When there is volatility, macro funds tend to do well because they have a lot of options, generally speaking. With an increase in volatility, the value of the options goes higher, regardless of the direction.”

For Eric Siegel, head of hedge funds at Citi Private Bank in New York, that could benefit both “systematic” funds and “discretionary” asset pickers.

“We’ve seen an increase in interest amongst our clients for Macro ... based on conversations with other industry participants, I would not be surprised to see flows into macro strategies increase in 2016.”

Reporting by Simon Jessop, editing by David Evans

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