Often overlooked by institutional investors, global macro promises to be the darling hedge fund strategy of the coming months, and institutional investors that turned their backs on it in 2000 after the struggles of Soros and Tiger are now returning. Steve Drobny is co-founder of Drobny Global Advisors, a global macro advisory business. He has just published a book, Inside the house of money, comprising interviews with 13 different players in the industry, which is designed to educate investors about the strategy. “Investors are now realizing that global macro is no riskier a strategy than any other,” says Drobny.
Peter Thiel, CEO of $2.1 billion global macro fund Clarium Capital, based in San Francisco, who features in the book, believes the market environment is ripe for the strategy. “There are some large imbalances in global markets right now that offer excellent opportunities. The world people believe exists at the moment just doesn’t make sense. If you have some insight into what is really going on, you can tap into those opportunities,” says Thiel. The biggest theme Thiel is basing trades on is oil money. “A lot of money is being made out of oil, but where is it going?” he says. He thinks it is playing out in the US property market and even more so in the UK, since London is the centre for the flow of oil money. He says it is also resulting in sterling being overvalued.
The fundamentals are certainly in place for global macro hedge funds to do well and the strategy also benefits from its lower correlation with other approaches. The correlation to other directional hedge fund indices is less than 0.5 to a passive index of global macro managers.
So why have investors not caught on? For several reasons, say managers. “There was a view that started developing leading up to 2000 that markets are these perfectly functioning machines,” says Thiel. “That we are in a world where markets are efficient; and that nothing is out of kilter so no manager would be able to find something interesting out and exploit the opportunity.” Little has changed in investors’ minds, he adds.
| Net inflows into macro hedge funds creep up |
| Estimated growth of assets/net asset flow for macro 1990 to Q2 2006 |
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| Source: HFR |
Albert Hsu and his partner Tim Crowe agree with Thiel. A year ago they set up Anchor Point Capital, an investment advisory firm specializing in hedge funds that includes pre-packaged funds of funds, separately managed accounts and advisory work. Both have long-term experience of investing in hedge funds. Hsu was the US investment officer at The Atlantic Philanthropies, and Crowe the CIO at the Knight Foundation. About a year ago Hsu and Crowe were looking at investment possibilities and saw global macro as a good opportunity. They will therefore be launching a fund of global macro hedge funds in the last quarter of this year. “The environment is ripe for global macro guys, particularly discretionary ones, who can act fast,” says Hsu. Institutional investors’ reluctance to allocate to global macro is understandable, Hu says, but they could be missing out. “Global macro has traditionally been associated with big gunslinging managers who take huge one-way directional bets, like Soros did in 1992 betting on the pound. Global macro managers today, however, are not practising in the same fashion. Many are not managing huge amounts of capital, or leveraging eight to 15 times. Instead the maximum might be six, and the average is three to four times leverage. And they take down risk much more quickly, with more of a focus on risk management than before.”
Drobny says investors should look at spreading investments across several global macro hedge funds in order to reduce volatility. “You can get a wide disparity of returns with global macro hedge fund managers where one guy can be up 50% and one guy down 10%. The world is at their fingertips, so returns are bound to differ. The way to approach the strategy is to diversify and reduce volatility.”
Anchor Point Capital’s global macro fund of funds will have between 12 and 15 managers selected from a universe of about 200. Each of the managers invested in has a number of investment themes rather than just one or two. Hsu says that there is a fine balance between investing in too many managers and investing in too few, and some present investors in global macro funds are falling down on this point.
There are capacity constraints involved in running a global macro strategy, however. “There are liquidity constraints in some commodities like grains and metals, and our capacity will be dictated by our underlying managers,” says Hsu. “A number of our managers are closed already, and some are closing, so have given us limited capacity. I expect we could be a few hundred million dollars in size.” And while Clarium has managed to be very large, Thiel says inflows have been gradual.
Transparency is a stumbling block for potential investors. Hsu says: “Global macro funds are rather opaque. It is not like long/short or credit where you might be able to get the positions if you so require. It is highly sensitive information. A manager may only have 20 positions on and they don’t want to share that information. They’ll share their themes and that can appease endowments or foundations but pension funds will not buy into that. But because global macro has gone out of favour and the area is inefficient, they should really be trying to uncover why global macro could be attractive at this point.”
Perhaps they should read Drobny’s book fast before the global imbalances really start to unwind and they miss the boat.
