March 6, 2018 / 6:55 PM / in 3 months

Some U.S. macro hedge funds thrive with renewed volatility

NEW YORK (Reuters) - While February’s stock market sell-off and renewed volatility battered macro hedge funds, some escaped unscathed: Quest Partners’ flagship fund returned 18.9 percent in the year through mid-February for clients that include the pension fund for the New York police and fire departments.

“The majority of our clients are trying to add to their positions with us,” said Nigol Koulajian, founder and chief investment officer at Quest, which has $1.5 billion in assets under management.

Not all macro hedge funds can say the same.

Quest is a systematic macro hedge fund - so called because it bets on macroeconomic events across asset classes. The strategy spans systematic management - which uses macroeconomic and other data to inform computer-driven trading, like Quest or Bridgewater Associates - to hands-on discretionary management, like at Brevan Howard and Caxton Associates LP.

The common thread across these firms is that they invest in global liquid markets, and often follow long-term market trends. The strategy’s selling point is low correlation to short-term market movements and to other hedge fund strategies.

While macro funds were down 4.86 percent in February according to the Hedge Fund Research (HFR) macro/CTA industry index, that has primarily been driven by big losses across systematic funds.

Within macro funds, HFR’s Systematic Diversified CTA Index was down 7.36 percent in February, while the losses at big-name discretionary firms hovered around zero.

Caxton’s Global Investment fund was down 0.44 percent in the month to Feb. 27; Moore’s Macro Managers fund was up .58 percent in the month to Feb. 15; Paul Tudor Jones’ Tudor BVI Global fund was up 0.38 percent in the month to Feb. 23.

“It’s been a long, long time” since macro funds brought in decent returns, said Raymond Nolte, chief investment officer at SkyBridge Capital.

Still, many macro funds are hopeful the spike in the Cboe Volatility Index .VIX means a comeback. Rising volatility produces market inefficiencies - assets are mispriced amid the chaos and traders profit by exploiting the discrepancy in prices.

Macro funds are particularly hard-hit when long-running trends change because their positions are difficult to exit quickly. Quest is an exception: a unique predictive strategy allows it to follow short-term price changes, according to Koulajian.

Macro funds outperformed the broader industry during the financial crisis, but lost money in seven of the nine years since, according to HFR. This is due in part to bad directional calls and in part to the Federal Reserve’s post-crisis monetary interventions that quelled volatility.

But recent moves suggest macros may have problems taking advantage of volatility ahead. Traders were whipped around as they attempted to follow violent price swings as the stock market sold off over concerns about rising inflation.

Traders who were long equities took off their bets. Therefore, when the market snapped back later in February, “they didn’t have as much exposure on. And so they’re not getting the recovery that you would have expected if they had just held the positions,” Nolte said.

Abandoning their strategy by pulling out of long-term positions before the market had established a clear direction ultimately caused more pain. After a decade of losses, investors seem to have lost faith in their strategy at just the wrong moment.

FORCED INTO MINI-MAKEOVERS

The overall macro underperformance has forced funds to reconsider their methodologies, teams and risk strategy.

Balyasny Asset Management LP last year parted ways with two veteran traders, Gregory Pappajohn and Erik Cetrulo, after the firm’s emerging markets, foreign exchange and interest rate positions underperformed, according to two Reuters sources who wished to remain anonymous because of the issue’s sensitive nature.

After their lackluster performance in 2017 because of losses in global macro, multi-strategy investment firm Balyasny reduced risk by re-allocating assets and staff from directional, or trend-following, strategies to lower-risk strategies like relative value trading, according to the firm’s year-end letter seen by Reuters.

Balyasny did not respond to several attempts to reach the firm for comment. Neither Pappajohn nor Cetrulo responded to phone calls or emails.

Balyasny’s shift signals the firm is not confident there are big directional moves in the markets it can follow, settling instead for safer bets that profit off of mispriced assets in volatile times. While lower-risk strategies make it harder to lose money, they also make it harder to make money.

Reporting by Kate Duguid; Editing by Jennifer Ablan and Nick Zieminski

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