The tide has turned: Global macro’s great comeback continues
July 29, 2022
A few months ago, we had asked1 the question – is global macro finally turning the corner after a decade of relative underperformance compared to other hedge fund strategies, and set for a grand comeback?
Well, if the first half of 2022 is anything to go by, the answer to this question is a resounding yes. The post-pandemic renaissance of global macro has continued this year, with the category delivering average returns of 8.98%2 for the six months ended June 30. In comparison, equity hedge funds – the biggest component of the $4 trillion3 hedge fund industry – posted an average loss of 12.3% during the same period.
To put global macro’s outperformance in a broader context, the HFRI Fund Weighted Composite Index, a widely followed gauge of hedge fund performance, declined4 5.9% in H1 2022, while the S&P 500 plunged4 20% over the same time frame in its worst mid-year performance in more than five decades.
Stellar returns amid increased volatility
Several high-profile global macro traders have posted windfall gains5 this year, thanks to their successful wagers on different asset classes, amid persisting volatility in equities, fixed income and commodities markets.
For instance, Said Haidar’s eponymous Haidar Jupiter fund is up a whopping 170% for the six months ended June 30, while Crispin Odey’s Odey European hedge fund – which aggressively shorted longer-dated bonds – gained 114% during the same period, it has emerged. Bridgewater Associates’ Pure Alpha II fund returned 32.2%2 in the first half, and Brevan Howard’s flagship vehicle delivered a 14% gain for this period, helped by its bearish wagers on sovereign debt – particularly around the medium-term maturity spectrum.
Other big-name traders have also burnished their credentials amid the wider market rout in 2022. Rokos Capital Management’s macro fund, which bet on a spike in bond yields, was up 12% for the first half, while AQR Capital Management’s global macro fund gained 23.1% through June, sources said.
Many other macro funds profited handsomely in recent months by anticipating successfully that short-term U.S. interest rates would spike faster than market expectations, a bet that turned out to be right with the Federal Reserve’s recent consecutive hike of the benchmark federal funds rate by 75 basis points.
‘Regime change’
As we had said in March, global macro was well poised to capitalize big time on the “reflation trade”, with major central banks worldwide finally starting to unwind their extraordinarily accommodative, decade-long monetary policies involving zero-bound interest rates and quantitative easing.
And, as the Fed, alongside its counterparts in the U.K., eurozone, Australia and elsewhere in the developed world, have embarked on an aggressive rate hike journey in recent months to curb soaring inflation6 not seen for over a generation, bond prices across the yield curve have jumped significantly in tandem, thus delivering huge gains for macro traders.
The normalization of monetary policy, in the form of rate hikes and quantitative tightening – pullback of large-scale bond-buying programs – has meant normal price discovery mechanisms are increasingly getting restored, much to the delight of macro funds that love to place directional bets across bonds, currencies, etc. Another tailwind on this front has been rising geopolitical tensions and supply chain disruptions amid the war in Ukraine, which has triggered a substantial upswing in commodities’ prices.
Broad-based returns
Global macro’s outperformance in 2022 has been pretty broad based, in terms of sub-categories, with commodities, fundamental discretionary and quantitative trend-following strategies all doing well. Nearly all sub-indices in the HFRI Macro category went up in H1 2022, the only exception being the HFRI Macro Discretionary Thematic Index that declined 0.6%. This reflects the typical low correlation between macro strategies and short-term movements in broad markets, which helps macro funds position themselves as a credible hedge against soaring market volatility.
Market share gains – more inflows, more launches
Macro’s grand comeback has not gone unappreciated, with net inflows and assets under management (AuM) both growing significantly in recent times. Macro strategies attracted the highest influx of capital in the first quarter, worth $40bn, taking their aggregate AuM to $677.8bn7 – almost 17% of the hedge industry’s total assets. The impressive Q1 allocations came on top of the post-pandemic mandate gush that saw the category boosting8 its AuM by 43%, or $139bn, between March 2020 and October 2021.
That’s not all. The first three months of 2022 saw 45 global macro vehicles being established4, accounting for about 25% of the total new launches in the industry, and topping9 both event-driven and relative value arbitrage. This highlights the growing confidence of institutional investors that global macro will be able to protect their portfolios and preserve capital amid raging inflation, persisting geopolitical and macroeconomic uncertainty.
Outlook
By most yardsticks, inflation in the advanced economies shows no signs of moderating over the near to medium term, and inflation expectations also continue to remain elevated. This dynamic means the investing environment for global macro funds will remain attractive going forward, as central banks seek to restore their credibility around price stability via an aggressive monetary tightening cycle.