COLUMN-Rehabilitating macro hedge funds :Mike Dolan

(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)

LONDON, April 23 (Reuters) – For all the bad press, much-maligned hedge funds have had their best start to the year in decades, while mixed stock and bond funds flattered to deceive – and even macro hedge funds are back in vogue.

High-profile battles between short sellers and online day traders over Gamestop, as well as the Archegos and Greensill debacles, made 2021 appear to be a nightmare for the industry.

But data from Hedge Fund Research (HFR) this week showed a wild few months for corporate events, cryptocurrencies and the macro-economy saw hedge fund assets overall jump $201 billion in Q1 to top $3.8 trillion by March.

While average gains of 6% across all strategies during the quarter seem modest against 5.8% gains in the Wall St’s main S&P500 index, it masks 7-8% average gains in event-driven funds, dealing in the likes of mergers and acquisitions, and a stonking 120% performanced in cryptocurrency funds.

Uncorrelated macro hedge funds focused on currencies, commodities and interest rates, whose performance has suffered during many years of low economic volatility and near zero interest rates and inflation, also drew a torrent of inflows.

HFR said total capital in Macro rose by $14.4 billion to $618 billion, with an estimated $875 million of net new investment during the quarter. Not quite the glory days of the 1990s, but something is changing.

With inflation risk high on the radar given expectations for a post-pandemic economic boom amid ultra-loose monetary and fiscal policies, commodity-focused funds beat the average with 6-7% gains.

But for the same reason, record highs in stocks during the quarter disguised a 4% drop in global bond returns – which leaves the 4%+ gain across diversified macro funds more impressive against many mixed stock and bond funds.

‘FAST AND BIG’

Societe Generale’s Alain Bokobza cautioned about this “flattish” average performance of multi-asset funds.

“Despite the financial dailies regularly running headlines proclaiming new highs for equities, and despite ever more active state intervention underpinning the credit markets (think Air France), most multi-asset funds are struggling to perform.”

If bonds of near zero yields are no longer a good buffer against equity drawdowns, then something else is needed in multi-asset portfolios.

And it’s in this light that long-term strategists are starting to look again to the original role hedge funds were supposed to perform.

Jan Loeys at JPMorgan reckons the low macro volatility and long average U.S. economic expansions of the so-called ‘Great Moderation’, which almost doubled to 8.5 years over the past 30 years, was now likely at an end. The political and economic price of often jobless, slow recoveries has been too high.

“The go-fast-and-big of today’s policy making both shortens the business cycle and increases macro-economic volatility,” he wrote.

“For longer-term investors, it makes macro hedge funds more attractive,” said Loeys. “I have not seen a case for including hedge funds in a strategic portfolio over the past 10 years, as collectively they underperformed a bond-equity portfolio with the same volatility, but this is changing now.”

Wealth managers see the picture.

Pictet Wealth Management Chief Investment Officer Cesar Perez Ruiz says the post-pandemic world is ripe for hedge funds – high mergers and acquisitions activity, including defensive M&A in pandemic-hit sectors such as banking, and a need for a new diversifier if bonds and equities correlate so highly. “We also like Macro hedge funds as ‘who pays the bill’ will be key and this will be different in each country so HF managers have an unique opportunity to add alpha,” he said. “If they don’t perform this year, there is something else going on with the asset class.”

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