Hedge funds that place bets on bonds, stocks, currencies, and commodities are one of the industry’s biggest winners in 2022 easily outperforming growth and tech funds’ returns and getting ready to see large inflows of capital as the stock market hovers near the bear market territory.
So-called global macro funds yielded 10.3% in the first four months of 2022 while the average hedge fund advanced by 1.9%, data from Hedge Fund Research showed. The Standard & Poor’s 500 index (.SPX) dipped 13% in that period.
Over the past three years, global macro funds generally achieved positive returns but they also fell behind the hedge fund industry’s stronger returns. Now with inflation soaring and volatility ticking sharper as central banks undo years of monetary stimulus, the environment seems to be extremely good for global macro funds.
“This environment will most likely lead to new inflows of capital to the strategy at the expense of other funds,” said Eamon McCooey, head of prime services at Wells Fargo.
Global macro funds invest around 17% of the industry’s $4 trillion in assets, lower than the 28% invested by funds that place bets on corporate events, and the close to 30% invested by equity-focused hedge funds, according to Hedge Fund Research data.
Over the first quarter, the latest available data, flows were increasing as investors directed $3 billion in new capital into these strategies, compared with $1.9 billion entering equity-oriented funds. On average, $19.8 billion was put in the first quarter, HFR data show.
Scott Bessent, who manages Key Square Group after having built up his reputation as a major global macro investor by assisting billionaire George Soros put together his famous bet against the British pound three decades ago, told investors he is even keener about the environment now than in early January.
Bessent said in his letter:
“We are now seeing a series of longstanding economic, political, monetary, and portfolio management systems breakdown. What we see for the remainder of the 2021s is a cascading series of system collapses.”
This is paving the way for a “large pipeline of vast opportunities,” Bessent said, adding that events with a low probability of happening are “becoming more numerous” as central banks are undoing ultra-loose monetary policies.
The company refused to comment further on the letter.
Individual funds’ returns are making the case, with the tiny Trium Larissa Global Macro fund gaining 30.9% in the first four months of the year, while the blue-chip Brevan Howard Master Fund climbing 12.04% this year through April.
Bridgewater’s Pure Alpha registered a return of 26.37% in the first four months. The firm informed investors it is nearing capacity limits, according to extracts of a letter seen by Reuters. A source with knowledge of the matter said the firm is considering giving back capital to investors in the near term.
AQR’s Global Macro Strategy rose 21% and told investors its strategy has profited from the end of fiscal stimulus and also from high inflation. Graham Capital Management’s Quant Macro went up 21.7%, boosted by commodities and foreign exchange.
“We are finally in an environment that we expect to stay conducive for the macro strategy,” said Darren Wolf, global head of investments, alternative investment strategies at global investment company abrdn, which is based in Edinburgh.
To position themselves to benefit from the shift in tastes and capital, several firms are improving strategies. Cinctive Capital Management brought in former Brevan Howard trader Giles Coppel this year to expand a team as clients requested it. Earlier in 2022, Schonfeld Strategic Advisors allocated $5 billion to the strategy.
Investors deem macro managers are likely to maintain momentum, given that markets are foreseen to both bounce higher and lower with volatility. However, there could be some dangers.
Christian Lee, head of international alternative investments at Itau USA Asset Management, which manages $11 billion in a fund of funds stated:
“You can have a problem when many managers are crowded in like trades. One example is the commodity trade. It’s become quite popular and it’s worked very well. Commodities can be some of the most volatile assets out there so one might want to be a bit cautious.”