Relevance of investments in Macro hedge-funds in the current market environment




- Good day, Aliya, thanks for your time. First of all, could you tell us please about Global Macro strategy.


- Good day! Yes, of course. At first, I would like to remind you that hedge funds are the same investment funds, which are very similar to mutual funds, but differ in terms of content. If traditional funds are aimed at «overtaking» the index and achieving the relative returns, then the main goal of hedge funds is the absolute returns, i.e. positive returns regardless of market fluctuations. Besides, in contrast to mutual funds, whose activity are strictly regulated, the hedge funds have wide spectrum of opportunities in choosing the tools for investment.


To date there are more than 30 thousand hedge funds of various strategies in the industry. According to the latest data, about $5 trillion are concentrated in hedge funds, which is comparable with GDP of Japan. As a rule, investors into hedge funds are large institutional investors, insurance companies, sovereign and pension funds, other big market players, as well as other high net worth individuals invest in them via premium banks and family offices. As I told before, first of all, hedge funds are an interesting asset class in terms of their return and risk profile.


Also, let me remind you that there are a lot of categories of hedge funds. Among the main strategies we can highlight the equity strategies, event-driven strategies, arbitrage and relative value strategies and macro strategies (or, as it is commonly called Global Macro).


So, Global Macro strategy differs from other strategies by the application of “top-down” approach. It means that if in other strategies the managers try to determine the undervaluation or overvaluation of certain securities and forecast the corporate events related to them, then the Macro managers earn more by identifying the economic trends, market deviations and expectations related to future cyclical or structural changes in certain countries or regions. In other words, a main idea of the strategy is to identify the economic trend or structural disbalances in early stages whether it is a currency devaluation, increase in prices of commodities, divergences in monetary policies or something else, after what they capitalize on trends or correction of imbalances. By the way, the word «hedge» indicates the initial aim of hedge funds in implementing the bets for something that will happen. At that, the strategy will not be limited to some sort of regional market or assets – the investments are made by the funds, on the contrary, in full range of financial tools including shares, corporate stock, currencies, commodities, for implementing the views, and the «global» part supposes that the strategy covers the assets all over the world.


Besides, I would notice that a Macro strategy itself is also divided into various sub-strategies, which may differ from each other by approaches and focus and as a result by tools and markets, on which they mainly trade, but as a rule, these are the most liquid markets.


A remarkable example of the Macro funds trades is the largest deal of George Soros’s Quantum Fund against the British currency in 1992. Soros understood that the pound was overvalued due to high inflation and low interest rates in the country. Knowing these and other macroeconomic backgrounds, his fund started opening the short positions against the pound since summer 1992. It means he was betting that the country’s currency would decrease. In September the volume of short positions has reached $10 billion, and the Government of Great Britain was forced to disengage from the European currency system to let the pound float freely that resulted in its devaluation in the amount of 15% with regard to Deutsche Mark and in the amount of 25% to dollar, and for Soros it resulted in a profit of $1 billion just within one day. This day is called “Black Wednesday”.


-Please tell us, what are the advantages of investing in Global Macro hedge funds in current market environment?


- As we can see today, macroeconomic and political factors have a significant impact on markets and dynamics of their price characteristics. In such environment the Macro managers feel like «fish in water». Their task is to forecast the actions of central banks and politicians, act faster than the institutional investors (who often make the decisions at not very frequent investment committee meetings) and be capable of making the right bets in most cases. At this, such bets are not a revelation. For example, many people have said previously that the markets are overheated, monetary policy shall be strict, inflation may happen to be non-temporary and so on. An advantage of Global Macro managers is the ability to separate the real trends from rumors, panics and nonsense thanks to the well-established professionalism. And since there is a lot of noise out there, there is more investment opportunities for Global Macro. Besides, if earlier the markets have been overvalued for a long time and have been managed by liquidity flows it was difficult to evaluate them fundamentally (assets’ prices that supposed to be not expensive were expensive), now the markets have started indicating more fundamental factors.


In general, the changes observed in inflation regime and aggressive monetary policy measures of the largest central banks have a structural impact on global economics and markets creating a variety of investment opportunities for Global Macro managers. So, since beginning of the year in the background of economical and geopolitical tension, as well as market volatility Macro hedge funds have demonstrated a double-digit return while the main stock markets, bonds and gold markets are demonstrating the significant losses from 5% up to 30%. For example, Bridgewater Pure Alpha Major Markets fund managed by the largest manager Bridgewater Associates has been showing the return in the amount of 25%.


-And what are the main risks of strategy at this?


- For sure, Global Macro hedge funds do not always bring returns to everyone. The managers often resort to the use of a significant leverage to get more profits. Many of you, probably, remember the story with Long Term Capital Management (LTCM) fund. In addition, Macro strategy often intends using the purposive strategy that means opening the one-way positions, we call them «directional» bets, which may, in case of error, bring a significant loss especially when a large leverage was involved in. Also, many hedge funds of this kind of strategy use a systematic approach based on quantitative models that use algorithms and may not work in some certain market situations. And of course, successful investments in hedge funds mostly depend on thorough selection of funds and subsequent monitoring them – a dispersion in returns between the groups of the best and worst funds is significant and sometimes exceeds 20%.


-How do you see the main role of investments in Global Macro hedge funds in portfolio?


- Investments in Global Macro hedge funds perfectly diversify the risks of the portfolio, decrease an exposure of the portfolio or portfolio beta to volatility in stock and bond markets, as well as improve portfolio risk-adjusted return, thanks to low and sometimes negative correlation with other assets. In the environment of high inflation and volatile inflation expectations, when a correlation between equities and bonds is positive and keep growing, the Global Macro strategy may be an excellent hedge against their drawdown, which was demonstrated by performance of Macro hedge funds from the beginning of the year. Besides, a high liquidity of Macro hedge funds allows them to quickly adapt to changes of market conditions. In other words, they are able to completely change a portfolio structure and their positioning in a fairly short term that gives them an edge at the increased volatility of markets. To summarize, I would like to conclude that the Global Macro strategy allows to allocate the risk at a global scale.


-Aliya, thanks for the interesting conversation. I wish you every success in your work!

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