Global macro hedge fund managers are back in the game
The end of the free money era & the return of macro uncertainty
The last 3 years have seen the world significantly change in terms of geopolitics, climate change actions and investment outlook. Following the GFC in 2008, central banks took the lead to support financial markets by injecting massive liquidity in the system. Coordinated central bank actions were multiplied when the COVID outbreak hit the world in March 2020. One of the main consequences is that high inflation is finally back and monetary policy needs to be dramatically reversed. The era of free money has now ended and so has the low volatility market regime for all asset classes. Market volatility can be measured in a number of ways. In the chart above, the well-known quant manager AQR tries to identify regimes of ‘macro turmoil’, where macro turmoil is defined as any 12-month period where the magnitude of macro news is higher than average. They measure macro news using changes in real GDP growth and inflation, and also surprises (vs. economist forecasts) in real GDP growth, inflation and industrial production. Since 2020 we are back in this so-defined macro turmoil environment. These periods could last long like during the 70s and the 80s or around the GFC, periods which have been strong years for global macro managers.
Higher volatility expected to remain
Swings in monetary policy expectations are likely to remain an important market driver in 2023, meaning that equity-bond correlations could remain high. This is what happened this year, with the 60/40 model portfolio showing its worst return for 80 years! Looking forward, the multiple risk factors – hawkish central banks, structural inflation, bursting bubbles, slowing economy, energy crisis, geopolitical tensions, industrial disruption, growing social unrest – do not necessarily mean that markets will go down but they will probably remain volatile. During sharp market corrections, volatility tends to spike, liquidity dries out and correlations increase suddenly, which could lead to forced deleveraging.
More risks but also more opportunities
In this context, uncorrelated hedge fund strategies such as global macro should be well indicated to help diversify portfolios. Macro managers take long and short positions across a range of liquid asset classes (rates, equity indices, currencies, credit indices and commodities) mainly through futures and options to try to generate attractive decorrelated returns over time. They are up on average between +11.4% and +23.1% YTD as of the end of October (returns of the HFRI Macro index and the CS Macro HF index) having made money mainly shorting rates and being long the USD. They tend to show positive returns during market dislocations. Historically, when implied volatility has been high (VIX above 25), equities have been down on average -11.3%, while macro strategies have generated +6.1% annualized returns (source UBS HF PB).
Flexibility and tight risk management are the key of their success
The advantage of global macro is the flexibility of the mandate. They can invest in all asset classes, but where the opportunities are. In a highly volatile environment, the probability of getting good entry/exit points is higher. A global macro manager is successful in producing good risk-adjusted returns over time if he has a good risk management framework and particular attention is made on this aspect in their due diligence process. Sitting with high levels of unencumbered cash, now yielding 4%, they are now paid to wait and engage risk when they see interesting investment opportunities. In conclusion, the continuation of a tight monetary policy and a high volatility regime should prove favorable for macro managers in 2023.
 Global Financial Crisis
Hedge Fund indices: HFRI Macro Total index (HFRIMI Index), Credit Suisse Global Macro index (HEDGGLMA Index).
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