Hedge fund managers are preparing to enter the second half of the year with plenty to be bearish about – and not much, it seems, to make money from.
A welter of macroeconomic shocks since the beginning of 2011 have dented portfolios for the big-name fund managers that trade the world’s economic balances. Many are fearing worse to come.
The month of May saw the average hedge fund lose 1.18 per cent, according to Hedge Fund Research.
But the average global macro hedge fund – which tend to be the biggest and most celebrated in the industry – lost more than double that with a 2.38 per cent reverse.
This year is shaping up to be the third in a row that global macro funds, specialising in bets on interest rates, sovereign bonds and currencies, have underperformed. And the list of those in negative territory is a roll-call of star names.
Caxton Associates’ main fund is down 3.38 per cent, Tudor Investment Corp’s main fund is down 2.25 per cent, Moore Capital’s flagship is down 2.84 per cent and Fortress has seen its macro fund dip 2.44 per cent, according to the latest May and June figures from investors in the funds.
Emerging market-focused macro funds are faring even worse. Brevan Howard’s EM fund was down 4.64 per cent for the year as of the end of May, according to a client of the firm.
Moore Capital’s emerging market fund, run by superstar trader Greg Coffey, a leading light in the London hedge fund firmament, was down 7 per cent over the same period.
While such losses are not individually huge, they are demoralising – coming as they do after months of lacklustre post-crisis returns for macro managers. And there are fears that they will deepen this year as markets get even more jittery.
“We seem to be entering a vortex of bad news,” says the chief investment officer of one of the world’s biggest macro hedge funds, declining to be named. “Some people are moving to cash, at least for the next few weeks.”
The summer period – traditionally quiet – has proved itself a testing time every year since the crisis began in 2007.
This year, two big themes are playing on managers’ minds: a reversal in sentiment over the US economy and the eurozone debt crisis.
“There’s an ugly contest between the US dollar and the euro,” says Jens Nystedt, global strategist at Moore Capital, at the GAIM conference in Monaco, the European hedge fund industry’s glamorous annual event, on Tuesday.
“The Fed wants the dollar down against everything, including the euro.”
But no matter how low the dollar seems to fall, Europe’s crisis appears to be deepening.
Shorting the eurozone currency is the “herd trade du moment”, another hedge fund manager at the conference points out – a possible reason to steer clear.
Almost exactly a year ago, macro managers were burnt badly by a short euro/long Asian currencies trade, which then seemed like a bright idea.
While the fundamentals were sound, a technical Asian sell-off triggered a mass-unwind that hit traders.
But European policymaker efforts to avert a triggering of the default clauses on Greek credit default swaps contracts have pushed hedge fund managers away from using the derivatives altogether, leaving the currency as the only liquid way of expressing a view.
For some, there are far bigger concerns.
“The euro is a sideshow, a complete sideshow,” says the chief investment officer of one of the top-tier global macro funds. “What is happening in the US, and what will happen to all of these recovery trades, is the real issue.”
With a third bout of quantitative easing from the US Federal Reserve apparently off the table, serious questions over the possibility of a US slowdown are being entertained.
Concerns about the path of the US recovery have already begun to hit some managers’ portfolios – many of them not even global macro specialists.
Paulson & Co in particular has taken a hard knock. Its flagship Advantage plus fund, which manages $9bn, is down 20 per cent this year.
Other managers, such as David Tepper’s Appaloosa Management, have been selling their large holdings of US banks.
Amid such losses, managers are looking at what they can do to try to spread risk.
Och-Ziff, the $30bn listed US hedge fund, was revealed last week to have taken out huge options bets on S&P 100 companies in an apparent volatility hedge over the summer.
Shorting the dollar remains popular but is rarely done with a great deal of conviction, thanks to so much uncertainty over the euro and Asia. Being long commodities, meanwhile, carries its own set of volatility risks.
The biggest problem – and not just for the macro hedge fund traders – is that genuinely diversified investment opportunities are very thin on the ground in spite of so much economic and political upheaval.
As Kevin Harrington, head of research at Clarium Capital, the US hedge fund, tells his peers at the GAIM conference: “Everybody has had an accidental global macro portfolio – making very large bets on inflation without necessarily realising it.”
Whether you are betting on US banks, oil, emerging markets or bonds, Mr Harrington notes, “you are taking the same bet, just in a number of different ways”.
For some big macro managers, it is a quandary that leads to only one real conclusion: this summer, just as in 2008, cash is king.
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