Investors Eye Potential Of Macro Hedge Fund Strategies

Terry Flanagan

Macro hedge fund strategies are back in vogue right now after event-driven and equity hedge funds had led the way earlier this year.

Mirroring trends across financial markets, hedge fund performance during May was widely divergent across strategies, with macro strategies performing well, for instance, but equity hedge funds less so.

Macro funds posted their best monthly performance since April 2011, while equity hedge posted its largest decline since September 2011, according to recent data from Chicago-based Hedge Fund Research (HFR), a provider of data and analysis to the alternative investment industry.

“There is a lot of interest in macro strategies at an investor level,” Mark Parsonson, executive director of UK-based fund of hedge funds manager Liongate Capital Management, which has $3bn under management, told Markets Media.

“We’ve been structuring some interesting macro portfolios for our clients. Macro didn’t have a great time last year, along with most hedge fund strategies, but investors are recognizing that these strategies have great potential to diversify versus traditional equity and bond exposures.”

Hedge funds utilizing a global macro investing strategy take sizable positions in share, bond or currency markets in anticipation of global macroeconomic events in order to generate a risk-adjusted return. Many global macro funds have been benefiting, more than most, from the escalation of the eurozone sovereign debt crisis in recent months while most equity hedge funds, the most common type of strategy today, which invest in stocks that are undervalued and short-sell stocks that are overvalued, were aided from the strong equity rally at the start of the year but have since been held back by the same European debt troubles that are now advancing the recovery of macro strategies.

“Historically, during periods of significant market volatility with large down moves, macro has done a very good job of delivering positive to flat returns,” said Parsonson. “With macro headlines driving risks in markets, there is a strong case for allocations to the strategy to help diversify these risks for many investors.”

HFR’s HFRI Macro Index posted gains of 1.7% in May while the HFRI Equity Hedge Index saw falls of -4.1% in the same month, but both strategies, year-to-date, have performed remarkably similarly despite taking different routes to their gains. The HFRI Macro Index is up 1.9% year-to-date, while the HFRI Equity Hedge Index has risen 1.8% in the same period. Event-driven strategies, meanwhile, declined by -1.4% in May, paring year-to-date gains to 3.1%.

“We’ve seen mixed performance from strategies this year,” said Parsonson. “Event-driven and equity hedge did very well in the early months of the year—when equities were doing relatively well—until recently. May wasn’t a great month as volatility resurfaced. One of big drivers for equity strategies was because last year’s correlation was so high. That correlation broke down earlier in the year and the equity guys who focus on those markets were able to realize a lot of value through the increase in dispersion because valuations had become distorted.

“In contrast, macro strategies generally underperformed earlier in the year but have gained some return in the second quarter volatility. This is in line with expectations versus their broad risk profile.”

Overall, the HFRI Fund Weighted Composite Index posted a loss of -1.6% in May, to add to its monthly declines in March and April—with year-to-date gains reduced to just 2.5% across all main strategies globally—after hedge funds had begun the year brightly, posting their best start to a calendar year since 2000.

“During the volatile month of May, investors reacted to increased European bank and sovereign bond risk and weakening U.S. economic data by aggressively moving portfolios toward less risky exposures,” said Kenneth J Heinz, president of HFR.

“This risk-off response adversely impacted certain areas of equity-sensitive hedge fund exposures, while benefitting strategies tactically positioned to insulate portfolios and produce gains resulting from the strong trends and volatile environment which materialized. In the current environment, at some level, every hedge fund is a macro fund.”

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