So he’s like a pirate, surfing the macro seas in search of booty to plunder (and when I say “booty” I mean it in pirate parlance, not Trump parlance).
The problem is, you won’t let him do his pirating.
See if you invest with a pirate (let’s say, for instance, you help fund some ship improvements or maybe you put up the money for some new swords and sturdier wooden legs), you have to understand that the returns are going to be uneven.
Some months, you’re going to take some losses.
Maybe there was a run-in with the Royal Navy, or maybe a squall blew the ship off course, or maybe they made a wrong turn at the Cape of Good Hope and ended up in Antartica. Who knows. They’re pirates.
But if you just let them do their pirating, well then at the end of the year they’ll come to port with chests full of riches. You don’t ask where it came from, you just take your cut and wink at the parrot.
Well, a lot of investors don’t understand any of that. And because the people with the checkbooks aren’t willing to let the macro pirates do their pirating unfettered, macro funds are underperforming.
According to Crise, the reason these swashbuckling macro managers have been the worst of the bunch when it comes to YTD hedge fund returns is because investors refuse to “unshackle” them (and yes, that’s a quote).
Of course it could simply be that the managers suck at their fucking jobs.
A little more than six months ago macro investors were upbeat on hopes that this year would “make macro great again.” However, for many of them 2017 has been little more than a one-way trip down the Boulevard of Broken Dreams. While there are certainly idiosyncratic reasons why this year hasn’t panned out as expected, in the bigger picture macro investors need to go back to their roots to return to profitability.
- After a buoyant end to 2016, macro investors were bullish on their prospects for this year. Reflation and growth were the order of the day, leading to consensus positioning that was long dollars and short fixed income.
- Obviously, things haven’t exactly gone according to plan. The Trump administration has yet to deliver meaningful measures to spur the economy, and for now there’s little near-term prospect that we’ll get them.
- Meanwhile the French elections were a vol-killer as the establishment figure won at a canter. Anyone betting on a replay of 2016’s votes, or any sort of volatility, has been hurt.
- Throw in disappointing data in the U.S. with more upbeat news elsewhere, and you have a perfect recipe for disappointing the late 2016 consensus.
- More generally, however, many macro funds aren’t structured to make money by “trading macro.” Investor pressure to deliver steady returns has taken macro traders away from making big-picture bets on economic and policy developments.
- How can you position for a theme expected to yield results over a 6- to 18-month time horizon if you are expected to make money every single month? Introducing strict path dependency makes it difficult for many macro traders to operate in the area where they have an edge.
- One traditional way around this is to do carry trades and use the proceeds to fund option bets offering asymmetric payoff profiles. Unfortunately, carry remains paltry and low realized vol has made most option bets worthless.
- To return to the halcyon days, macro funds should focus on big- picture themes where there is more signal and less noise. Just as importantly, investors and allocators need to give them the freedom to make these bets rather than expecting cash-plus returns from a strategy with no beta. Until allocators take off the shackles, they should get used to micro returns.