Macro Is Dead, Long Live Macro

If you read the popular financial press you may be led to believe that because a few macro funds have closed down this year, a few legendary traders have closed their funds over the past few years, and because global macro as a category has done poorly post-crisis that macro is dead.  If we have learned anything post-DotCOM bubble it is that when a strategy has died it is really just coming back to life.

Let’s address the above reasons for macro’s supposed death. The first is that a few prominent funds have closed this year. Everest, COMAC, and Fortress have or are closing their doors. They all got hit hard when the Swiss National Bank blew their EUR/CHF peg earlier this year. Everest basically blew up, COMAC decided to turn into a family office, and Fortress kept fighting the fight in public until announcing a few weeks ago that it is closing up its macro business. Here is the thing though, of the three only one lost “all” their money. COMAC was down something like -8% and decided to turn into a family office while Fortress appears to have been down around -17% before shutting its doors.  Have you EVER heard of a long only equity guy closing up shop after a -8 or -17% drawdown? Have you ever heard anyone say that “the SP500 should be shut down because in the 2000’s it has been down over -50% not once but TWICE? It is kind of ridiculous to extrapolate that an entire category of trading is dead because a few guys were down a bit and decided that instead of dealing with the press they would rather just deal with their personal account.

This segways nicely into our next point regarding “a few legendary traders have closed their funds over the past few years.” To think that macro is dead because Soros and Druckenmiller both returned outside money is ridiculous. Forbes has Soros net worth at like $25 billion and Druckenmiller at $4.5 billion. Now I have no idea if their true net worth is half the Forbes number or double the Forbes number but either way they both have billions, have both been working for a long time, and both can still trade, or not trade, while enjoying whatever they feel like enjoying.  And for those that want to say “but Druck was down -5% when he shut down his fund” my response is you’re an idiot. He returned 30%+ forever, all his investors had net gains, and for all you know by the time the year was closed out he was up double digits. Again being down -5% is not really a big deal. In fact the SP500 was down double digits just a few weeks ago…..and I didn’t hear anyone saying “this is proof that market capitalization weighted indexes have lost their touch.” Oh and in case you are wondering by all accounts Druckenmiller made a bunch of money in 2014 and so far in 2015 so I am pretty sure his “loss of touch” was more his “I am sick of shuffling papers I just want to hang out with my family, trade my own money, and watch the Steeler’s play football.

Investing is different from most other professions in that if you are at the top of your game going private gives you a better chance of outperforming than if you are in the public eye. If you are an athlete, musician, artist, doctor, engineer, etc. you need to see people and do things with people in order to know if you are any good or not. Trading is different in that at the end of the day you can see your returns and you don’t have to care if anyone else does.

The last point, at least for today, is concerning the idea that because global macro has done less than awesome post-crisis it is useless and must be dead. Remember 1998, 99, and 2000? Julian Robertson closed his shop, Warren Buffett was down -51%, and value investing was dead. Yeah I wonder how that turned out. Remember around that same time how commodities had done nothing for what some might refer to as “forever”? Over the next 10 years both value and commodities did awesome. By the way what do both Julian and Warren B have in common? They are both called “value” investors but they have also both traded commodities, derivatives, currencies, and anything else that represented “value” to them. At the same time we have someone like Joel Greenblatt who has always been a stock/bond value guy and a Bill Miller who runs equity only mutual funds.  All of these guys would be lumped into the same value bucket and yet they all invest wildly different and have very different business structures.

Some funds, macro and otherwise, have investors who want very low volatility and decent returns. If you are a pension fund that “needs” 7% a year over time then a 20% year is great but a -10% year is the end of the world. The pension funds goals are steady and consistent returns but they have no need for shoot the lights out performance. Other investors on the other hand give a manager a portion of their money and they expect high returns and understand that usually that entails the potential for more risk. There are many other classes of investors but these two will do in order to make this point. Most hedge funds these days, macro or otherwise, are not playing to the sound of the SP500. They are not in the business of playing to some benchmark that someone from the media picked for them. Instead they are trying to play to the benchmark that they have set with their investors. Some of the investors have no economic incentive to beat the SP500 but instead to match their liabilities…..and this is why, or at least a huge part of why, “hedge funds have under-performed” post-crisis.

With all the different strategies and business models inside of strategy categories it is stupid to lump them all together. One of these days I will write a larger post on why the media gets hedge funds wrong but this is one of the key reasons.

All this is a long way of saying, and I am not sure how well I said it, that global macro is not dead and can’t really die. As long as their are trends, and there always are, there will always be some people on the right side and others on the wrong side of them.

By the way we have seen reports of a lot of managers being up double digits even while other funds are struggling. In the case of our newsletter, and of course I have to tout it, we are up around 14% for the year. We are directional macro looking to take 5-15 positions long and short across stocks, bonds, commodities, and currencies at any one time. If this type of thing sounds interesting to you then please take a trial of our service.

Happy Trading,

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Real Returns, The Pension Fund Crisis, and Buy and Hold

One of the largest problems that seems to be getting little attention is that of the pension fund crisis.  While it has yet to hit in earnest it is definitely upon us.  The basic problem is that due to poor returns, both nominal and adjusted for inflation, pension funds are extremely underfunded.  While everyone in the investment world seems to know about the problem it does not seem as though anyone is talking about it.  So here are some charts that show the problem with the standard pension fund.

In the chart below we are looking at someone who started at the beginning of 1995 investing $1,000 a month, in a 70/30 stock bond mix, rebalanced monthly.  We are using real returns on the SP500 and on the Dow Jones Corporate Bond Index as our investment proxies.  Also in the chart is the same $1,000 a month invested solely in T-Bills.  As you can see T-Bills are actually slightly ahead and have had very little volatility and is at $184,120.  The 70/30 mix on the other hand has had a rocky path and is at $181,173.20.  Essentially the typical 70/30 stock bond mix in real terms has returned virtually nothing.  You could have saved the same $1,000 a month and put it in T-Bills and you would be ahead after nearly 15 years. (Click on chart twice to enlarge)

70/30 Stock Bond Real Return $1,000/Month Rebalanced Monthly


We could write about this topic for days and will in fact cover it more in future posts but the problem is obvious.  Pension funds are underfunded and there is no way in hell that without a major bailout from the government that they will be able to meet their liabilities.  So add this to the mix of current spending habits, unfunded liabilities of medicaid and social security, and the other retiree problem.

What is the “other” retiree problem?  The primary issue is that if you have a 401K, IRA, or other non-pension fund retirement plan you are likely under water.  Up until this year when investors, along with the Fed, have been flocking into bonds, most investors have been primarily invested in stocks.  How has that done?  Well in nominal terms it has been less than great.  If you were invested in an index fund over the last 10 years you would still be under water.  In real terms things get even worse.

In the two charts below you can see the SP500 from 1950 to now adjusted for inflation as well as the % drawdown.  As you can see we are still very much under water.  In fact as of the end of October the indexer is down -45.51% from the highs reached back in August of 2000. (Click chart twice to enlarge)

SP500 Real Returns and % DrawDown


Happy Trading,

Disclaimer-We wish there was a way to short Pension Funds.

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Title: Real Returns, The Pension Fund Crisis, and Buy and Hold

Global Macro Trading

After being the largest hedge fund strategy in 1990 representing 71% of the overall hedge fund assets global macro has shrunk and now only represents about 15% of total assets.  While most people assume that this dropoff in assets was due to poor performance the numbers actually show a totally different story.  In fact according to the Credit Suisse/Tremont Hedge Fund Indexes, global macro has been the number one investment strategy with a total return of 502% from 1994 through June 2009.  Compare that with a total return of 335% from long short equity or 321% from event driven funds.

Of course most investors also have a misguided perception that every trade is like the trade that “broke the Bank of England.”  That trade in 1992 made Soros and his Quantum Fund over $1 Billion in a few days and garnered a lot of publicity.  The funny thing is that in a study done later by the IMF it was shown that if anything hedge funds shorting the Pound actually dampened the effects.  And in interviews since it is obvious that while the position size was huge the realistic downside was not.  Yes, Soros had a $10 Billion position on that week but thats not the right way to look at it.  Instead he and his portfolio manager Stanley Druckenmiller figured that if they were wrong they would lose a few hundred million at worst and that if they were right they would earn a billion or more.  Anyone who has traded for any period of time will tell you that a trade that has a risk to reward ratio of 5:1 is a fantastic trade.  As you can see, not only did Soros and Druckenmiller not break a bank, but they also did not take a huge outsized risk.

So while most investors think that global macro is made up of a bunch of drunk cowboys that are always swinging for the fences the real stories, and the numbers behind them do not bear this out.  In fact if you look at what global macro has actually done you will see that macro traders are some of the best risk managers in the world.  In the chart below we have the Barclays Group Global Macro Index and the SP500.  Starting with $1000 from 1997 to the end of July 2009 the Global Macro Index delivered 219.77% with a worst case drawdown of 6.24%.  Contrast that with the SP500 which from 1997 tot he end of July 2009 only delivered 33.30% with a worst case drawdown of -52.56%. (click on chart to enlarge)

Barclays Group Global Macro Index Vs. SP500 Jan 1997-July 2009


The above chart shows how well that global macro has done in absolute terms since 1997 but what about the risk that they took to achive these results?  Well as you an see in the chart the dips in the macro index look a lot shallower and shorter then the dips in the SP500.  Looking at the actual drawdowns shows that this is in fact the case.

In the chart below we have the drawdowns of the SP500 and then the drawdowns of the Barclays Group Global Macro Index.  As you can see the SP500 has had two massive drawdowns in the last 12 years.  The SP500 dropped over -46% in 2002 and then dropped over -52% in 2008.  In fact as of the end of July 2009 the SP500 is still down over -36%.  Contrast this with the Barclays Global macro Index which has had a worst case drawdown of -6.42% and is currently only -3.22% away from new equity highs. (click on chart to enlarge)

Barclays Group Global Macro Index and SP500 drawdowns Jan 1997-July 2009


As you can see the perception of the global macro trader as a gunslinging cowboy is anything but the truth.  Instead they are some of the most consistent and risk adverse traders in the world.  In fact some of the hedge funds with the longest, and best, track records are global macro funds.  Three of the best and longest running global macro funds are Soros and his Quantum fund which have delivered north of 30% annually since 1967, Bruce Kovner and Caxton Associates have delivered over 25% annually since 1983, and Paul Tudor Jones and his BVI Global Fund has returned 23% annually since 1986.  Obviously these are some of the best of the best but can you name three other fund managers with returns like this, that also follow the same basic strategy?

So what enables global macro to do so well when everyone else is rapidly losing money?  Global macro does well because of the fact that it is entirely opportunistic.  Macro does not pigeonhole an investor into US equities or emerging market bonds, or European event arbitrage.  Instead macro enables investors to go wherever and whenever.  By trading all four major asset classes not only can macro traders generate uncorrelated returns but can also see dislocations that other investors miss, or in some cases are forced to miss.  For example if a long/short equity manager thinks that we are on the verge of hyperinflation and wants to be long gold he has two different options.  He can go long companies that should do well in the face of inflation and then go short stocks that should do poorly.  The macro trader on the other hand has far more flexibility and can go long commodities, go long and short currencies, go short regular bonds, long TIPS, and can still go long and short stocks.  The opportunity set is much larger for the global macro trader then it is for the long/short equity manager.

Going forward we see no reason to believe that global macro will not continue to outperform.  When we are in a bubble and everyone is making money, macro will perform inline or slightly underperform, and when things go crazy and everyone else is losing money global macro will be generating positive returns.

Happy Trading,

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Title: Global Macro Trading