Macro hedge funds for the year of the bang that peers want to forget

Bond and currency hedge funds are on track for their best year since the global financial crisis, boosted by a sharp rise in interest rates that has inflicted heavy losses on equity specialists and mainstream investors.

The so-called macro hedge fundsmade famous by the likes of George Soros and Louis Bacon, suffered a barren period when markets were calmed by trillions of dollars of central bank bond-buying after 2008. But this year they have thrived thanks to seismic movements in global bond markets and the bull run in dollar as the US Federal Reserve and other central banks grapple with rising inflation.

Among the gainers are billionaire trader Chris Rokos, who rebounded from losses last year to gain 45.5% in 2022, helped by bets on rising interest rates, including during the UK market turmoil in the autumn. That leaves co-founder Brevan Howard on track for his best year since launching his own fund in 2015, now one of the world’s largest macro funds with about $15.5 billion in assets.

Caxton Associates CEO Andrew Lowe gained 30.2% as of mid-December in his $4.3 billion Macro fund, which is closed to new money, according to an investor. Said Haidar’s New York-based Haidar Capital gained 194 percent in its Jupiter fund, helped by bets on bonds and commodities, and was up more than 270 percent at one stage this year.

“It reminds me of the early part of my career when macro funds were the dominant style of investing,” said Kenneth Tropin, chairman of $19 billion-asset Graham Capital, which he founded in 1994, referring to strong periods for macro traders during 1980s, 1990s and early 2000s.

“They were really hedge funds that were deliberately uncorrelated with people’s underlying exposure in stocks and bonds,” Tropin added.

Global stocks have fallen 20 percent this year, while bonds posted their biggest declines in decades, making 2022 the a year to forget for most asset managers. But hedge funds, which can bet against bonds or treat currencies as an asset class, have jumped ahead. Macro funds have gained an average of 8.2% in the first 11 months of this year, according to data group HFR. That puts them on track for their best year since 2007, at the start of the global financial crisis.

Traders profited from bets on rising yields, such as on two-year U.S. debt, whose yield jumped from 0.7% to 4.3%, and the 10-year bond, which rose from 1% to 3.6%. A surprise change was made by the Bank of Japan in its yield curve control policy that sent Japanese government bond yields soaring an additional boost to returns.

“They gave every macro trader a wonderful Christmas – even the office security is short Japanese government bonds in my opinion,” quipped one macro hedge fund manager.

With the “artificial suppression of volatility” from ultra-loose monetary policy now gone, macro traders are likely to continue to profit from their economic research, said Darren Wolff, global head of investments, alternatives at Abrdn.

Computer-managed hedge funds also benefited, with many of the market moves providing long-term trends. These so-called managed futures funds are up 12.6%, their best year of returns since 2008.

London-based Aspect Capital, which manages about $10 billion in assets, gained 39.7% in its flagship diversified fund. He wins in markets including bonds, energy and commodities, with his biggest single gain coming from bets against British gilts. Leda Braga’s Systematica gained 27 percent in its BlueTrend fund.

“We’re in a new era where the unexpected continues to happen with alarming regularity,” said Andrew Beer, managing member of US investment firm Dynamic Beta. Jumping yields and fast-moving currencies provide opportunities for trend-following funds, he added.

The gains are in stark contrast to the performance of stock hedge funds, many of which suffered a miserable year as fast-growing but unprofitable technology stocks that climbed in the bull market were sent tumbling on rising interest rates.

Chase Coleman’s Tiger Global, one of the biggest gainers among soaring tech stocks amid the coronavirus pandemic, has lost 54 percent this year. Andreas Halvorsen’s Viking, which pulled out of stocks trading at very high multiples earlier this year, had lost 3.3 percent through mid-December.

Meanwhile, Boston-based Whale Rock, a technology-focused fund, lost 42.7 percent. And Skye Global, founded by former Third Point analyst Jamie Stern, lost 40.9%, hit by losses in stocks such as Amazon, Microsoft and Alphabet. Stern wrote in an investor letter seen by the Financial Times that he was wrong about the “seriousness of the macro risks”.

Equity funds as a whole are down 9.7%, putting them on track for their worst year of returns since the 2008 financial crisis, according to HFR.

“Our biggest disappointment came from those managers, even well known with years of experience, who failed to anticipate the impact of rising interest rates on growth stocks,” said Cédric Vouignier, head of liquid alternative managed funds and research at SYZ Capital. “They didn’t recognize the paradigm shift and buried their heads in the sand.”

With the exception of 2020, this year marks the largest gap between the top and bottom deciles of hedge fund performance since the aftermath of the 2009 financial crisis, according to HFR.

“For the past 10 years, people have been rewarded for investing in hedge fund strategies related to [market returns]” said Tropin of Graham Capital. “However, 2022 was the year to remind you that ideally, a hedge fund should also provide you with diversity.”

Additional reporting by Katie Martin

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