Hedge funds build macroeconomic strength to take advantage of volatile markets

Hedge funds are building their firepower in global macro trading, seeking to capitalize on the most lucrative environment since the financial crisis.

Macro trading, a decades-old strategy made famous by George Soros and Louis Bacon, involves betting on the movements of global bonds, currencies and other assets.

After years of boring reversals in markets dominated by central bank stimulus, the sector has been turbocharged by sharp interest rate cuts during the coronavirus pandemic, followed by a return to high inflation and steep interest rate hikes as economies reopen.

Schonfeld, Graham Capital and US-based ExodusPoint are among the companies hiring in the space. Managers are preparing for the expected inflow of capital from investors looking to protect their portfolios in an environment of volatile markets and declining support from central banks.

“There has been a paradigm shift in interest in macroeconomics from the previous decade to the present, in large part due to central bank activity,” said Kenneth Tropin, chairman of the $17.5 billion Graham Capital firm he founded in 1994.

“Macro markets are moving like crazy, last year was particularly good and the opportunities are fantastic looking ahead,” he added. The Connecticut-based firm recently hired an economist and macro fund manager and is looking to add more investment professionals.

HFRI Macro Performance Index (Total) (%) column chart showing macro hedge funds recovering

In February, the Financial Times revealed that multi-strategic hedge fund Schonfeld has hired Schonfeld manager Ben Melkman — who began building a presence in discretionary or human-led macro trading about two years ago — plans to hire aggressively in the space as it diversifies further in this area.

Last month, ExodusPoint Capital, which has $13 billion in assets under management, hired London-based Patrik Olsson, former chief investment officer at Nektar Asset Management, to lead its macro strategy. New York-based MKP Capital is increasing its workforce in an attempt to capitalize on what it sees as “structural change” in the markets. And London-based Trium Capital launched the macro fund late last year, with the end of quantitative easing heralding a “rich era of global macro,” according to co-CEO Donald Pepper.

Demand for macro investors is “extremely high, both quantitatively and discretionarily,” said one hedge fund recruiter.

One of the oldest hedge fund strategies, macro hedge funds struggled for years as trillions of dollars of central bank stimulus dampened market volatility and drove interest rates to near zero, limiting their ability to make profits.

However, since the beginning of the pandemic, they have largely enjoyed a recovery, with many such as Caxton Associates and Brevan Howard making good gains as interest rates were cut in 2020 to revive economic growth.

And while some funds, most notably Rokos Capital and Odey, were hit hard by the major bond market shocks in fall 2021, last year was the strongest for macro funds since the onset of the 2007 financial crisis.

Funds gained an average of 9 percent last year, helped by soaring bond yields and a strengthening dollar, compared to a 17.7 percent drop in S&P 500 total return and heavy losses suffered by many equity managers.

Among the biggest macro winners were Ken Griffin’s Citadel, which earned 32.6 percent in its fixed income and macro fund, giving it its best-ever annual return, and Caxton Associates, whose Macro fund led by CEO Andrew Law gained 35 percent.

And Rokos, which has gained more than 50% and has already increased by another 6.5% this year, has opened up to new money and wants to increase its assets worth USD 15.5 billion by about USD 3 billion to take advantage of the attractive commercial opportunities.

Major movements in the bond and currency markets have also provided a lucrative environment for computer-guided funds that bet on such global market trends. Man Group, one of the world’s largest hedge fund firms, reported last week that most of its $779m performance fee in 2022 was earned from its systematic macro funds.

“Macro dispersion comes from central banks and governments, which creates opportunities [quant trading arm] AHL,” said CEO Luke Ellis, referring to the big moves in global markets.

The DBMF fund of US investment firm Dynamic Beta gained 23.5 percent last year, with the company’s assets more than tripled to about $2.2 billion. Markets are no longer constrained by central banks, which means the trends such funds thrive on will likely continue for years to come, said Paul Britton, chief executive of the $8.6 billion Capstone, which had staff at trend tracking and currency trading areas.

According to data group eVestment, despite strong returns, macro funds experienced four years in a row of investor outflows. This was likely due to investors reducing their allocations in response to years of poor returns, while last year some investors reduced macro allocations that grew too large in their portfolios relative to stocks and bonds that plummeted.

However, many believe that the macro is likely to continue to be a big winner in the current market environment.

“We see the need for macro across all our portfolios,” said John Sedlack III, senior manager of alternative investments at Abrdn. “Higher interest rates correspond to better macro returns.”

And in a recent survey of investors managing $1.4 trillion in assets, BNP Paribas found that macro was the best strategy last year and is now one of the most popular allocation strategies.

“Investors are particularly focused on the paradigm shift and what’s happening with interest rates and inflation,” said Marlin Naidoo, global head of capital injection at the bank. “Macro is very well positioned to take advantage of this.”


Leave a Reply

Your email address will not be published. Required fields are marked *