Macro Hedge Funds Had a Banner Year


Macro hedge funds, which look at economic trends and take advantage of dislocations across asset classes, had a banner year in 2022. On average, they notched a 12.2% return versus -0.7% for the broader industry.

It was all the more remarkable because nothing else worked. The classic 60/40 model — a portfolio with 60% in stocks and 40% in bonds — had its worst year since 2008. Meanwhile, the performance of crossover hedge funds, which had branched into the venture capital world to buy the hottest tech startups, was disastrous. Tiger Global Management, the most prominent in that category, lost 56%. 

This report card was sorely needed, because macro managers had lost quite a bit of shine since the collapse of Lehman Brothers Holdings Inc. These funds profit from disruptions. When global markets were dominated and becalmed by central banks’ bond buying programs, they no longer offered much value-add. 

With the world in disarray, macro funds are back in fashion. Looking at allocation plans for 2023 among all the trading strategies, investors favored macro the most, according to the latest Preqin survey. 

Nonetheless, the big question remains whether macro funds can repeat their outperformance and reclaim the industry crown. Crossover funds, popular with investors, are down but not out. Despite big losses, they are still launching new offerings and drawing in billion-dollar checks.

Macro funds may well have another good year ahead, judging by the global landscape in 2023. They’ve certainly got a few interesting investment themes and selling points. 

Consider how macro funds made money. Last year, they profited from challenging the authority of the biggest central banks. They made the correct call that policymakers were behind the curve on inflation, and that they would eventually turn hawkish and acknowledge that price increases were not transitory. For that, they gained from rising yields — such as rates on US two-year debt soaring from 0.78% to 4.43%. A surprise change by the Bank of Japan to its yield curve control policy in December handed another win to those bond bears.

This year, the game of chicken with the Federal Reserve continues, except that this time, investors are betting the US central bank will slash interest rates as early as the second half, while none of the officials are penciling in any cuts and are hammering a different message. Once again, traders have a very different view on inflation. Bond bears are turning into bulls.

Macro funds can also make money when the biggest central banks are not in sync with each other on monetary policy. For instance, a short on the Singapore dollar, especially against the neighboring Malaysian ringgit, is gaining traction after the Monetary Authority of Singapore signaled it had finished its tightening cycle. Last year, Singapore kept up with the Fed better than all its Asian peers and its currency is thus thought to be overbought.

Sustained directional moves are equally important. Consider Commodity Trading Advisor funds, or CTAs, that trade a wide range of futures and indexes and make money by identifying trends in underlying markets. They can flourish only when the trends they trade remain in force for a while. Last year, a bull run in the US dollar netted them big bonuses and Palm Beach mansions. This year, quite a few, including Scott Bessent whose fund posted a 30% gain in 2022, are betting the other way. After all, if your big-picture conviction is Fed rate cuts and a China that is eager to be less reliant on the greenback, a gradual decline in the value of the dollar is the natural conclusion.

Last but not the least, institutional investors are no longer in love with US stocks. This is not good news for equity funds, the largest category that competes with macro managers for blue-chip investments. Earnings estimates are too high, economists are seeing a recession, and money managers are feeling the most bearish toward US stocks since 2005. As such, when the likes of pension and sovereign funds allocate money to hedge funds, macro managers, who often express their views in foreign exchange and interest rate markets, seem like a much better fit. 

Last year was a seismic shift for macro funds. Russia’s invasion of Ukraine and China’s Covid-Zero lockdowns disrupted global supply chains and the economic recovery. The biggest monetary authorities have lost some of their authoritative voice, and a few ambitious regional powers demanded more prominence in the world of finance. So if you think these kinds of frictions are here to stay, macro managers will continue to outperform.

More From Bloomberg Opinion:

• Tiger Global’s Day of Reckoning May Never Come: Shuli Ren

• Worrying About the Fed Is So Last Year. Here’s Why: John Authers

• Tiger Global and the Perils of Crossover Hedge Funds: Shuli Ren

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.

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