On the reasoning that investors may be looking to take risk off the equity table next year and are looking for an uncorrelated strategy, Brenda Tse, Hong Kong-based managing director at fund of hedge funds Permal, offers the opinion that they should be considering global macro if they are looking for a hedge-fund product.
Permal has a product in this range, named Permal Macro Holdings, which was up 9.8% in 2009 and up 5.2% year-to-date as at October 31.
AsianInvestor spoke to her to discover why she likes global macro.
What are the main themes governing macro investors?
Macro hedge fund strategies are making a strong case today. Take a quick glance at the lead stories and it's clear why this is the case, with signs of a US recovery, housing concerns, unemployment, eurozone debt contagion, China infrastructure, busy commodity markets, developed market stagnation, emerging market growth, Korea, and these are just some of the themes at play.
It is multi-asset, global focused, index-oriented, liquid, active trading and importantly agnostic to market direction. Macro investing covers the breadth of asset classes, including equities, government bonds, currencies and commodities. One of its diversification benefits is the extensive use of commodities and currencies. What you are not likely to find in a macro manager’s portfolio are individual stocks or credit securities.
Macro investors are seeking to benefit from the correlations among asset classes, geographies, and investment styles. If emerging markets look more attractive than developed markets, be it in currencies, yields or equity indices, then they will look to the emerging markets. The ability to be completely agnostic and flexible enables macro managers to adapt to market conditions. Macro covers tactical asset allocation, discretionary trading, and systematic trading.
Do you prefer discretionary or systematic macro managers?
Discretionary is particularly attractive because of its focus on politics and economic analysis, core disciplines to understanding today’s environment. This strategy has also proved more consistent and robust over market cycles. Systematic macro – or computer-driven trading – is also attractive as a smaller complementary allocation to discretionary, for systematic tends to outperform during periods of stress, as proved in 2008 when sustained downward trends developed in markets.
How do you pick a good manager? Every pundit has opinions on macro issues.
Macro is also one of the hardest investment disciplines to get right, so choosing the right manager is crucial. To be a good discretionary macro manager, you need to be an expert in many fields. In fact you need to be a top investor, a top economist and a top political analyst all rolled into one, and there are few managers who can make the grade. Even the average basket of managers can prove disappointing due to the high dispersion of returns.
You still need to select the right macro strategy to capture good absolute returns. For unlike other absolute return strategies, macro investments behave differently due to variable betas, long volatility and as a provider of liquidity.
How have they performed this year?
Having been through the one-way markets of 2008 (down) and 2009 (up), 2010 has been a mixed year, central to which has been the risk-on/ risk-off theme. And consistent with the last two years, it has been more important to make the right top-down macro calls, rather than trying to achieve alpha through bottom-up stock selection. The main drivers behind such high correlations in this environment, which have spanned all global markets, have been globalisation, liquidity-flows, impact of monetary and fiscal policy on markets, and nervous/ fragile markets. Not so long ago commentators and economists were focusing on decoupling, but such protagonists have gone quiet, for global markets remain highly – if not more – interconnected. Another development that has accentuated these macro trends has been the increased popularity of ETFs, which have been shown to move markets and further ignore underlying fundamentals.
So, what are your predictions for 2011?
Given the state of play in the markets, the factors driving high correlations look set to continue into 2011, a year that is likely to be shaped by the deep stresses in the three time-zones and how these will be solved.
Look at the US and it is all about whether the latest round of quantitative easing succeeds to stimulate the economy. If it succeeds, you are likely to see stronger equity and commodity markets, a stronger US dollar and lower bond prices. However if it fails, the results are more likely to be weaker stocks and commodities, weaker US dollar and higher bond prices, and will be followed by even more quantitative easing. At the moment, the more interesting exposures in the Americas are Canada and Mexico, both in fixed income and currencies.
For Europe, 2011 looks to be a year of event risk for the peripheral sovereign markets. Defaults, restructurings, exit from the euro, are all potentially on the cards. Contagion from Ireland could easily spread beyond the usual names of Portugal, Italy, Greece and Spain, and move to Belgium and to the former Eastern EU countries. Many of these countries are facing what are termed “DDD”, or doomed debtors dilemma; as they seek to reduce fiscal deficits they slow their economies, further weakening currencies and markets. As things stand, Norway looks the most attractive European currency and bond market.
The best proxy for emerging markets is China. Here it is about achieving a soft landing for the economy and taming inflation. How China handles these challenges in 2011 will have massive consequences on global macro markets, especially US bonds and commodities. When discussing China, there are also other large emerging countries to consider, such as Brazil and India, which are dealing with similar issues and pressures. Monetary tightening is positive for their currencies, but will put pressure on their equity markets.