Global macro sees a mixed year

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Global macro, a long-standing hedge fund strategy that thrives during periods of large economic swings, ought to be invincible these days. The uneven pace of financial recovery among various countries, and escalating sovereign risk, particularly with Greece, Portugal and Spain in the doldrums, present numerous plays for managers to exploit.

Yet the strategy’s 2010 showing has been mixed, March being the only positive month so far. While global macro generated a 2.6 per cent return during the January-March stretch, according to the benchmark Credit Suisse/Tremont Index, the spread between the best and worst performing fund was nearly 20 per cent.

This is not altogether surprising, given the sharp differences in opinion about the financial and economic environment.

Pollsters have noted wide divergence in managers’ forecasts of bond rates, currencies, equity prices and so on.

For every manager fearing inflation and new asset bubbles, there is another worrying about deflation. Some believe today’s asset prices demonstrate a “V” shaped recovery is well underway in the US while others say another down leg is coming that could threaten the nascent recovery and validate “double-dip” investment scenarios.

Two themes are emerging here. First, managers can no longer ignore the surprisingly upbeat quarterly earnings delivered by US companies and continued growth among emerging market powerhouses led by China. So they are changing tack, particularly if they failed to buy into last year’s market rally. Instead of focusing on the negatives, such as lax fiscal and monetary policies and worrying unemployment data, they are now looking to benefit from the cyclical bounce underway in the US and elsewhere, at least for the next six months or so. Their bearish argument has not altogether dissipated, though.

For example, Argonaut Capital Management remains downbeat in its medium-to-long outlook for the US, but sees “rays of light” appearing in the short term.

“There has been a striking pick-up in a number of short-cycle economic indicators that suggest the immediate growth outlook is comparatively strong,” says chief operating officer Jarrett Posner.

The outlook could change on a dime, however. “We still see this acceleration of economic activity as driven largely by transient and temporary factors, which will soon abate and possibly be undermined by the still-negative underlying economic trend,” he adds.

This dovetails into another emerging theme: the adoption of a more fluid investment style that enables a fund to react more quickly. “For trading oriented managers, 2010 will create even more investment opportunities than 2009 did,” says Mark Enman, head of global macro within Man Investments’ multi-manager business.

“The best performing managers have the ability to put aside their medium-to-long term fundamental views in order to trade short term volatility in a more pragmatic way. Those who stayed short risky assets in 2009, for fear of a double-dip in the global economy, didn’t fully take advantage of the opportunities.”

Mr Enman expects the strong correlation between “risky assets” that began in March 2009 to unwind this year. This would create a ripe trading environment for trades across a range of asset classes covered by global macro, including commodities, currencies, equities, and fixed income.

China’s possible revaluation of the renminbi, and the unwinding of quantitative easing and loose monetary policy in various parts of the world could also bring forth new trades, he adds.

Nonetheless, markets have been difficult to read at times. “The biggest surprise has been how the Greek sovereign crisis has escalated in the last four weeks, spreading to Portugal and Spain, but yet has had such small impact on global risk assets,” says Samer Nsouli, investment chief at Lyford Group.

For instance, on April 23, when Greece asked for a €45bn (£39bn, $60bn) international bail-out, a fundamental macro manager would have shorted the euro. Instead, the currency of the 27-member bloc rallied. “This shouldn’t have happened,” Mr Nsouli says. Nonetheless, the short euro trade remains a popular one and could pay off as the Greek credit contagion spreads by the summer.

Credit default swaps, the long protection trade on sovereign debt risk, have mostly worked well this year, says Matt Luckett, Balestra Capital’s general partner.

“It’s our view based on data and trends affecting markets that the situation in Greece is symptomatic of larger debt issues throughout Europe.

“At least four to five other countries within the EU exhibit serious fiscal issues and are finding it difficult to refinance their near-term debt.”

This reappraisal of risk occurring across Europe will create ample long and short investment trades.

Meanwhile, investors, particularly funds of funds, continue to like global macro, not only for the fact that it targets highly liquid securities that can be sold within hours. Toby Chandler, co-investment chief of Seal Capital, says there is a greater need for global macro to act as a hedge against potential systematic risk events in the future, notably in Europe.

Still, 2010 is likely to prove a lot more testing than the mid 2000s. “Without any sustainable breakout themes, especially in rates and currencies, it will be tough for macro strategies to move meaningfully into double-digit returns this year,” says Mr
Chandler.

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