If 2022 was the year when macro funds emerged as one of the few bright spots in an otherwise dismal 12 months across all asset classes, this is unlikely to be a one-off as the factors that led to their outperformance last year are likely to persist this year.
That is the view at least of a mixture of fund selectors, asset managers and analysts that FSA spoke with on the topic with many of them citing wage inflation, supply chain bottlenecks and geopolitical wrangling as continuing to fuel the outperformance of these strategies.
Macro strategies, which base their holdings on the economic and political outlook of a given country or certain other macroeconomic factors, experienced their best year in decades last year, on the back of some of the biggest interest rate and currency moves in many years.
Though the conditions that fuelled last year’s outperformance, notably interest rate differentials and a broad rally in the US dollar are unlikely to be repeated, market participants said the return to volatility means these strategies will continue to perform well.
“The dollar move was a 20-year move in nine months. So that kind of move they love. That’s a trend that many of those funds, depending on the strategy, benefited from. Will we see that move in the dollar again? Probably not. Will rates move up as much? From that perspective, probably the opportunities aren’t as foretelling as last year,” said Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management.
“Having said that, let’s say you have a deep recession, Treasuries have a rally, then you could have a year like last year if they catch that trend. Then you could have higher return potential.”
Outperformance
Hedge funds, much like alternatives overall, proved popular last year among asset allocators as they sought refuge from the turmoil in public markets, although this belied a big divergence in performance depending on the type of strategy employed.
While many of the long/short hedge funds got hammered because of their preference to buy stocks, macro funds had a standout year as some well-known macro firms such as Bridgewater Associates and Brevan Howard Asset Management reported record results.
Indeed, according to data from data firm Preqin, hedge funds returned -6.5% last year, their worst year since the global financial crisis, whereas in contrast, data from investment specialist Aurum shows that macro funds generated 7.6% in returns for the 12 months to September 30.
Market observers FSA spoke with attributed this primarily to central bank policy rate divergence, in particular the fact that a lot of macro funds made the successful wager that the US Federal Reserve would hike rates faster than other central banks around the world.
“It’s been mostly a fixed income story. They were able to benefit from trends that started to come up at the back end of 2021 about rising rates and re-pricing of interest rates across many curves,” said Francesco Paganelli, senior manager research analyst at Morningstar.
“I would say second to that has been currency. It’s been much less so for equity. There hasn’t been as much a strong trend on the upside or downside; perhaps in some selected contracts, for example the Nasdaq or the value complex.”
Can it be repeated?
Regardless of what drove last year’s outperformance, market observers all agreed that it was long overdue. Macro funds struggled for many years as aggressive central bank intervention in monetary policy had the effect of crimping volatility, thereby limiting the opportunities for macro fund managers to exploit price differences in related securities.
The biggest question is now whether the conditions that led to last year’s outperformance will prove to be short-lived or not, especially as inflation starts to recede and markets are pricing in the US Fed to pause interest rate hikes at the end of the first quarter.
One fund selector FSA spoke with said that he thought that while last year’s conditions would not remain as conducive this year, the outlook remained bright.
“If you are asking me whether we are going to see the same movement in currencies or central bank interest rates, the answer would be no,” said the fund selector.
“But are we moving towards a new paradigm where volatility, which has for so long has been suppressed, is now being baked into the system? The environment is a lot more conducive to macro funds than it has been in a generation. We can see that in terms of inflation, supply chain issues, energy prices, et cetera.”
Morningstar’s Paganelli was more tight-lipped on the question of whether this year would prove as fruitful for investors in macro strategies, although he pointed out that generating outperformance was not the crucial factor when determining their value in a portfolio.
“I think it was Buffett who said diversification is protection against ignorance. If you don’t know about the future and you don’t really want to dwell at night about having too high a risk exposure to equity risk, credit risk, duration risk and you don’t know what the future holds and you simply want to diversify, there’s a case for macro funds.”
