Some Benefits Of Trading Across Asset Classes-Or An Advertisement For Global Macro

With only a few weeks left in 2015 it would be a fair statement to say that there has been a lot of troubles in the asset management business. US Stocks are flat, bonds are flat, foreign stocks are down, commodities are down, junk bonds are down, and gold is down.  Here is a year to date performance chart of some of the major asset classes.  As you can see it has been less than ideal for the long only world.

Asset Classes

Some Major Asset Classes YTD

Years like this are why we are such big fans of being able to go long/short across asset classes.  In our model portfolio equities have been a drag in 2015 of a bit over -4.00%. We were short emerging market stocks for part of their fall but aside from that we mainly lost money on our equity trades.  Fixed income added slightly less than +1.00%. Being short commodities off and on, gold and copper, has added around +5%. This year currencies have been our big winner adding over +13.00%. As of last night our model portfolio is up 15.60%. Our worst drawdown on the year was -5.35% and we are currently down -1.83 from our equity highs.

TheMacroTrader.com Model Portfolio Equity Curve 2015

TheMacroTrader.com Model Portfolio Equity Curve 2015

If we had a fixed mandate of being only long equities, long fixed income. or long anything we would have been flat at best and probably negative for the year. Instead we had the flexibility to go where we found the best risk/reward opportunities.

 

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research

 

 

 

 

Trader, Economist, Expert On TV?

You have to decide what your goal is. Do you want to make money, sound smart, get on TV, etc? It sounds simple but the reality is that many investors get it very wrong. They think they are investing to make money but in reality they just try and impose their view on the market. Other people, a prominent gold bug comes to mind, just seem to want to be on TV. I am not even sure they are trying to make capital gains but instead just sell a product. Luckily I don’t think most investors fall into the TV camp….at least I hope not.

Where I see most investors go astray is when they fall into the sound smart/economist camp. Many investors do a lot of research for a view and then get so anchored into that view that they cant envision a different world.  This causes a lot of problems if you are ever wrong…..and everyone is wrong on a regular basis.

One recent case of the “this is what I believe and I am right” disease was peak oil. Everyone thought that we were going to run out of cheap oil and that it would stay above $100 forever. There were dozens of books talking about it, hundreds of websites, and thousands of research pieces written talking about how oil was going higher and never coming down. Here is a sample.

Twilight In The Desert

Twilight In The Desert

Of course as we all know now the only think that was peaking was the actual price of oil. The high price of oil spurred everyone to find new energy and new ways to extract oil. This brought us the surge in solar and wind capacity that is still going today, companies like Tesla, as well as a group of folks collectively referred to as “The Frackers”.  It was a long battle but five years post-financial crisis we finally saw the price of oil fall…and fall hard, going from $100/barrel to just under $40/barrel in about 18-Months.

Crude-20 year chart

Crude-20 year chart

If you held onto the view that oil was going to go higher forever no matter what, even once we started to see overwhelming evidence that fracking was very real and very repeatable, then you have likely lost a lot of money as both oil, natural gas, and all their related stocks have come crashing down.  It is not that the original research wasn’t accurate or that your initial view was bad, but instead that you stayed wedded to the notion that things don’t change and that you have to be right.

This happens time and time again. Think the Dotcom crash when the internet was not only going to change everything but that “the winners of the new world” were going to overtake everything and could never go down. (BTW Google that phrase and read the first result. Classic mania) Other recent examples would be gold or 3D printing stocks.

Ed Seykota has a great quote “Win or lose, everybody gets what they want out of the market” and while it has been beaten to death it is still worth pondering. If you are trying to make money you have to have “strong opinions, weakly held” and not “strong opinions, I can’t be wrong”.  This is why I like to think of myself as a trader economist. Every day, week, month, year I shop around for what makes the most sense given the current environment. What is the same, what is changing, and what looks like it might change are all better uses of your time than complaining that “they just don’t get it” because whether they get it or not if your positions are moving against you, pick your time frame, then you are wrong.

Most your ego from “I am right” to “I like to count my money” and your odds of success in this game will go up exponentially. If you want to be an expert or get on TV on the other hand than good luck with that.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research

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,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research

The Only Thing I Am Certain Of Is That Certainty Kills

One of the worst things that traders can do is to think they know anything. The more certainty you have the less flexibility you will have in changing your mind.

Of course we do all that we can to skew the odds in our favor. We read, we model, we figure out how to structure the trade, and we look at how it would fit in our portfolio.  We do all this but in the end we have to be ready to cut and run because there is no 100% certainty in this business.

In fact the more certain you are that you are right the worse it can be for you. Want to lose 100% of your money? Go find a stock that you “know” will go up where you “know” that everyone else is wrong and then hold onto it no matter what.

What is fascinating is that it is widely believed that if you buy a few stocks and hold them you will make money the reality is that about 40% of stocks actually lose money over time while 64% of stocks under-perform the indices over time. The belief comes from the fact that the indices go up over time as they dump the losers and add to the winners. The main takeaway is that many stocks-40% of them-have negative lifetime returns.(for more on this search for the paper “capitalism distribution” it is full of interesting and useful data)

Trade certainty gets even harder when it comes to commodities and currencies as there is no reason why any of them “have to” go higher. Look at a 30+ year chart of any of the major currency pairs or commodities. They go up, they go down, and they go back up again. This cycle repeats over and over.

If you can’t be flexible in your thinking then the only thing you can be certain of is that you will eventually lose a lot of money.  If you look at any successful fund manager who has been at it for a long time you will see a lot of flexibility in their approach. Maybe the king of flexibility is Soros.

Go read Alchemy of Finance* and you will see that while he explains all these grand theories on what he thinks is going to happen in the market he is wrong almost every single time. Despite this he made over 120% during his “real time experiment”.

A typical entry in the book would read something like this “I thought the Fed would do this and then the German Bundesbank would do this so I bought Deutchemarks” of course the Deutsche mark would then start to tank and he would sell out, double his size, short the Deutsche mark, and make $200 million.

Despite his belief that such and such was going to happen he was not against changing his mind at all once he realized he was wrong.  He has almost no ego in his trading and in the end just wants to be on the right side of the market. The Soros/Druckenmiller track record is the best 30+ year record I know of so maybe there is something to this whole figure out a view, bet on the view, and then if it isn’t working dump the view approach. Read anything you can about Soros/Druckenmiller and you will find that their true edge was not in their research or political* views but in their ability to change their mind in an instant.

I have been thinking of this more than normal the past nine days as most of our positions, which had been working very well for most of the year, started to go against us. At first you assume its just some normal volatility but then it gets worse and you have to say “I guess I am wrong now” and move on. It is annoying when you have a theme going that you still think makes sense but in the end you have to decide what is more important to you-being right or making money? They are definitely NOT the same thing.

 

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research

*Alchemy of Finance-If you have not read this book change that now. Read it 2-3 or even more times and you will get more from it each time.

*Political views-As far as I can tell Soros and Druckenmiller are on different sides of the political spectrum. But guess what? It doesn’t matter. This is just further evidence that politics have almost nothing to do with making money….unless of course you are a politican.

 

 

Global Macro-Generate Superior Returns With Less Risk

We at The Macro Trader are obviously fans of Global Macro as an investment strategy and even philosophy. Fortunately the data backs us up showing that global macro not only generates higher returns but does it with far lower risk than equities.

The chart below shows how you would have done if you had invested $1,000 into the Credit Suisse Macro Hedge Fund Index, SP500, and Barclays Aggregate Bond Index since 1994. As you can see the CS Macro Hedge Fund Index did drastically better than either stocks or bonds. To be more specific the CS Macro Index beat the SP500 by 2.11 times and the AGG Index by 2.75 times.  So that shows the returns but what about the risk taken to achieve these returns?

Global Macro vs SP500 vs Lehman AGG Bond Index

Global Macro vs SP500 vs Lehman AGG Bond Index

We have a few different charts to display the risks taken to generate the returns in each index. First we will show the historical drawdown charts. A drawdown is simply anytime you are not at new highs in your account. If you have $100 and lose $5 you are in a -5% drawdown. The deeper the drawdown the higher the return needed to get back to breakeven and the math, while simple, can be tricky. For instance if you lose -50% many think you need to make 50% to get to breakeven. The reality is that you need 100% to get to breakeven. In our case of being down -5% you only need a 5.26% return to get to breakeven but it gets harder the deeper you get.

Looking at a drawdown chart of the SP500 you can see that not only are stocks usually in a drawdown but over the past 20+ years we have had two massive drawdowns that took years to make up. We know them as the DotCom crash and the GFC-Global Financial Crisis. It took the SP500 57 months to recover from the DotCom crash and 50 months to recover from the GFC.

SP500-Drawdowns

SP500-Drawdowns

At the opposite end of the spectrum we have the drawdowns of the Barclays AGG Fixed Income Index. As you can see the AGG Index has frequent but small drawdowns with the worst one barely dropping below -5%. It only took nine months for the AGG index to fully recover from the worst drawdown and three months to recover from the second deepest drawdown.

Lehman/Barclays AGG Fixed Income Index Drawdowns

Lehman/Barclays AGG Fixed Income Index Drawdowns

Finally we have the CS Global Macro Index drawdowns. As you can see its worst drawdown was a -26.79% and its second worst was -14.94%. It took 19 months to recover from the -26% drawdown and 19 months to recover from the -14.94% drawdown.

Credit Suisse Global Macro Index Drawdowns

Credit Suisse Global Macro Index Drawdowns

Another way to show the depth and length of the drawdowns is to plot both the equity line as well as the new highs line. In each of the next three charts the green line equals the highest the equity line got, notice it never dips down, and the red line is the equity curve which goes both up and down.

Here is the SP500. As you can see while it hit a new high in 2007 it then went back down. In essence it took about 12 years before investors were really making new money. While this is a worse than “normal” period it is also not the first or the second time that the stock market has had a rough decade.

SP500 DD and NH

SP500 DD and NH

Looking at the AGG Fixed Income Index we see that the drawdowns are both shallow and short. If you were in the AGG Index you would not make the most money but you also took very little risk.

Lehman-Barclays AGG Fixed Income Index DD and NH

Lehman-Barclays AGG Fixed Income Index DD and NH

Finally we have the CS Global Macro Index. As you can see the drawdowns while larger than that of the AGG index are far smaller than the SP500 index. It kind of takes the middle route in regards to risk but it drastically outperforms both in regards to return.

Credit Suisse Global Macro Index DD and NH

Credit Suisse Global Macro Index DD and NH

Another way to look at the risk and return is to look at the 12-Month Rolling Returns. At any point in the chart you are looking at the returns you would have gotten if you had invested 12-Months ago.  As you can see the SP500-red line has the highest 12-Month returns but also the lowest 12-Month returns. The AGG Index-green line almost always shows positive returns but it never has a really big year. Finally the CS Macro Index-blue line again comes somewhere in the middle. It is positive almost as often as the bond index but the 12-Month period to 12-Month period returns are less than stocks.

Global Macro-SP500-AGG 12-Month Rolling Returns

Global Macro-SP500-AGG 12-Month Rolling Returns

Basically global macro has lower volatility and more consistent returns than the stock market and almost as consistent returns and far more gains than the bond market.  The main reason that this is possible is that as opposed to either the stock or bond index a global macro fund can go long and short anything and trade derivatives on anything. Most macro managers stick to liquid instruments but that still means you have hundreds if not thousands of tradeable instruments. The flexibility inherent in global macro allows you to always find a bull market somewhere whether that is being long stocks, short stocks, long the Australian Dollar, or short the Australian Dollar. You can bet on US Treasuries against German Bunds or across almost any other market relationship you can think of. Not only is global macro flexible but macro managers are famous for stringent risk management practices. It is almost cliche but in the end risk management is one of the keys to success in any trading approach and one of the most important things that separate macro from long only buy and hold.

What about claims in the press that “hedge funds have under-performed the SP500 since the GFC?” Well that is true but if you are picking only half a cycle than it is probably not a fair comparison. In the chart below you can see what happened to the CS Macro Index and the SP500 from the end of 2008 until the end of August 2015. As you can see the stock market is ahead.

2009-Now

2009-Now

Of course that was just in a bull move when everything was headed up. If instead of the end of 2008 or the end of February 2009 we use 2007 as our starting point we get a drastically different result. In this case the flexibility and risk reduction inherent in the global macro approach shines as the CS Macro Index outperforms the SP500 with both higher returns and far lower risk.

2007-Now

2007-Now

As far back as we have data global macro has outperformed both stocks and bonds across full market cycle. On the other hand long only equities has been profitable but has had some very long and deep periods of negative returns.  We are obviously biased towards global macro. We have a site and run a research service dedicated to it. You could say we drank the kool-aid and live and breathe this stuff. At the same time however many of the most successful money managers in history have been macro managers and the data shows that when done right it can lead to both higher absolute and risk adjusted returns.  So while we are indeed biased we think that the case is fairly strong in our favor.

 

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research