Analysis: Macro hedge funds down at half-year point, pin recovery hopes on central banks

Signature Bank

30/06/2023 06:00

By Carolina Mandl and Nell Mackenzie
       NEW YORK/LONDON, June 30 (Reuters) - Many macro hedge
funds that bet on global economic trends are ending the first
half of 2023 with losses, but uncertainty around how different
central banks will handle monetary policy could provide trading
opportunities for the rest of the year.
    After a surprise crisis of regional U.S. banks roiled
markets, those funds were down by 2.3% this year through May
according to the HFRI Macro (Total) asset weighted index, which
tracks performance of hedge funds betting on macro trends.
Investors said some individual performances suggest it may be
difficult for many funds to fully recover by the end of June.
That performance compares with a gain of roughly 13% for the S&P
and 0.1% for benchmark performance for hedge funds. 
    "The one weakest spot for hedge funds this year has been the
macro managers," said Jeffrey B Klein, a managing director at
Goldman Sachs External Investing Group, which invests in hedge
funds. "For the rest of the year, there could be a lot of
opportunities in the macro space because there'll be different
economic policies followed in different countries. Central banks
may not follow as much of a coordinated policy as they have over
the last number of years with very low interest rates."
    Hedge funds that bet on stock performance were up year to
date but on average still underperformed the broader indexes,
according to a Goldman Sachs report.
    While central banks around the world were in sync last year
and for most of this year raising rates to fight inflation, most
recently monetary policy has varied. The U.S. Federal Reserve
decided to pause its hiking strategy in its latest meeting, but
the Bank of England surprised investors last week with a rate
hike above expectations and some emerging countries like Brazil
are already considering a rate cut. 
    This divergence gives portfolio managers more trading
opportunities, investors said.       
    "Last year, the market was largely driven by those macro
overhangs, so you had these long lasting positions, kind of
short rates and long dollar. It was the gift that keeps on
giving it," said John Delano, managing director at asset
management firm Commonfund, which invests in hedge funds.
    Assets from different countries are more likely now to move
in different directions, he said. Currency moves are
increasingly out of sync.
    Some of the biggest macro hedge funds are Bridgewater
Associates, Brevan Howard and Moore Capital. 
    Some of the money-losing funds rely on active managers
instead of algorithms for trading. Haidar Jupiter ended May down
44%; Brevan Howard Alpha Strategies was down 1.99% and Rokos was
down 5%. The firms declined to comment on the matter.
    Last year, with bets that interest rates would remain higher
for longer to tame inflation, macro portfolio managers had
gained about 14% in the first half of the year and ended 2022 up
about 9%, according to HFR, outperforming the benchmark. 
    A regional banking crisis, however, caught portfolio
managers off guard in March, bruising their bearish rates
positioning right after Federal Reserve Chair Jerome Powell told
lawmakers the central bank might have to raise rates higher than
expected to tame inflation.
    Some hedge funds retrenched. London-based hedge fund Rokos
Capital Management decided to de-risk in March after it lost 15%
with the volatility in the bond market. In May it posted a 5%
gain, but it was still down 5% year to date. 
    
    POSITIVE PERFORMANCE
    Contrary to the performance in macro hedge funds, long/short
hedge funds, which bet on rises and falls in global stocks, were
up 5% as of June 23, Goldman Sachs  GS.N  said in a note to
clients. That still underperformed the rise of about 10% in
MSCI's  .MIWD00000PUS  broadest index of global shares.
    Hedge funds aggressively bet that stock prices of U.S.
companies would fall in June while remaining net bought on
European markets, said a separate note from Goldman Sachs sent
the same day.
    Delano said equity hedge fund managers have been more
cautious in terms of betting on a market direction in the first
half of the year. "You could call it a low conviction that this
market rally was going to continue," he said.
    Investors expect long/short hedge funds to end the year on a
positive note, as the impact of an environment of higher rates
is going to impact companies in different ways.
    Current market conditions have meant a big gap between the
best and worst performing stocks. This provides great
opportunities for hedge funds, said Bruno Schneller, a managing
director at INVICO Asset Management.

 (Reporting by Carolina Mandl, in New York and Nell Mackenzie,
in London; Editing by David Gregorio)
 ((carolina.mandl@thomsonreuters.com; +1 (917) 891-4931;))