Why ‘everybody’ is talking about global macro

Inflation, central bank rate hikes, the war in Ukraine, elections in the U.S., Brazil, and elsewhere, and more world events are causing institutional investors to consider global macro hedge funds or celebrate existing investments in them.

Kenneth Tropin, the chairman of Graham Capital Management LP, an $18.6 billion, Norwalk, Conn.-based macro hedge fund firm he founded in 1994, isn’t cheering for economic distress, but hedge funds like his are designed to perform well in market environments like the current one. Mr. Tropin described the period between 2015 and 2020 as “pretty dull” for macro strategies, but this year they have performed well and said they will continue to in the coming years.

Central bank rate changes and market volatility don’t happen in lockstep across countries and regions, creating macro strategy opportunities in markets like fixed income, foreign exchange, commodities, and emerging markets, according to Mr. Tropin.

“Did it feel like we were kind of playing an away game for five years? I guess so. And now does it feel like we have the home field advantage? I think that’s fair,” Mr. Tropin said.

Graham’s five largest global macro funds have done well so far this year. The Tactical Trend Series A fund, which gained 3.31% in 2021, was up 3.45% in August and 32.77% year-to-date; the Graham Quant Macro Series A, which lost -1.57% in 2021, is up 1.67% in August and 21.82% year-to-date; the K4D-15V fund, which gained 1.41% in 2021, rose 3.64% in August and has returned 46.93% year-to-date; the Absolute Return Series A gained 4.72% in 2021, but returned 3.45% in August and 19.82% year-to-date; and the Prop Matrix fund returned 6.52% in 2021 but returned 3.85% is August and is up 29.77% year-to-date, an investor in the funds told Pensions & Investments.

Inflation is proving to be a hard problem for central banks to solve, supply chain issues will persist, energy will remain expensive and other things like the psychology of employees — who have gained the upper hand bargaining with employers on remote work and compensation — won’t quickly reverse, according to Mr. Tropin.

“I see this environment for what we do continuing to be fertile for a long time, not just a year, not just next year, but as far as I can see. Now that will end at some point, but I don’t see that ending anytime soon,” Mr. Tropin said.

For those reasons, institutional investors are talking about global macro again.

So far, 2022 has been a breakout year for discretionary and systematic macro strategies for the State of Wisconsin Investment Board, Madison, which manages more than $145.8 billion in assets,and SWIB has been increasing its exposure to them, said Derek Drummond, portfolio manager of funds alpha at SWIB. In 2021, most of the $6.2 billion that SWIB invested in multiasset strategies were invested in hedge funds and that part of the portfolio returned 16.3% last year, according to its annual report.

While macro strategies can act as a hedge for portfolios, Mr. Drummond said that SWIB has “never” believed hedging should be their purpose and that global macro strategies are really a way to diversify and add alpha overlay to a portfolio. Put another way: a diverse collection of macro strategies sometimes is a hedge, often delivers good returns, and can do exceptionally well in periodic markets, according to Mr. Drummond. Investors also like global macro strategies for their liquidity. “Macro is one of those areas where you can modify your position or sizing very quickly. And, generally speaking, you don’t necessarily need to be with the really big managers or the really small managers” because global macro strategies are not limited by or require certain capacities like some other investment strategies, Mr. Drummond said.

SWIB allocates mostly to midsize macro hedge funds, which have more resources than small peers, and has its own in-house macro strategies.

Jonathan Glidden, the chief investment officer of Atlanta-based Delta Air Lines’ $19.1 billion pension fund, said it has a dedicated allocation to global macro hedge funds that makes the portfolio more dynamic with both modest growth and liability hedging. “We are hopeful that the allocation to macro strategies can help mitigate maximum losses. It has worked great this year. The macro portfolio also adds an element of diversified liquidity to the portfolio, which can be helpful in managing margin calls associated with LDI derivatives and the private market denominator effect,” Mr. Glidden said in an email.

Delta is happy with its dedicated allocation to macro and doesn’t plan to make any changes. However, it is leaning more into macro strategies in its large portable alpha program, designed to outperform Treasury bills with “very low beta to equity and other traditional risk premia,” Mr. Glidden said. Delta is increasing its exposure to macro managers, especially commodities traders, he said.

“Volatility is up significantly across most asset classes. We believe macro managers can benefit from micro-opportunities presented by investors’ reactions to economic, policy and geopolitical news in today’s volatile environment,” Mr. Glidden added.

The Missouri Local Government Employees Retirement System, Jefferson City, is not expanding its 10% allocation to what it calls the alpha asset class that is invested entirely in global macro hedge funds. If anything, “we may be trimming as the asset class” because it has performed well compared to other asset classes and the 10% allocation is growing as a result, said Brian Collett, chief investment officer of the $10.7 billion plan.

Missouri LAGERS is invested in global macro hedge funds that are focused on public fixed income, public equity, and some that invest in any public market, Collett said.

Bill Li, senior investment officer at the Massachusetts Pension Reserves Investment Management, Boston, said the $92.4 billion pension fund is currently invested in global macro hedge funds and that it doesn’t plan to allocate more, at least in the near future.

Outside of the systematic commodity trading advisers, or CTAs, and trend-following managers, the macro hedge fund universe is diverse. “Investors should be clear-headed about the pros and cons of individual offerings and how they fit in overall portfolio strategy — individual manager quality is more important than the size of the allocation in this space,” Mr. Li said.

Another pension fund CIO, who asked not to be named, said their fund has invested in macro strategies for decades and that the funds have performed well, including this year. “If anything, we are taking profits since the returns have been so good. I can understand why those who didn’t have exposure to the strategy might feel like they are missing out,” the CIO said.

In a survey of 87 endowments, foundations and health-care systems by BlackRock Inc. and Coalition Greenwich, a division of S&P Global’s CRISIL analytics business, between February and early April, just 10% of those institutions planned to increase their hedge fund allocations this year. Still, many institutional investors are already invested in hedge funds, like MassPRIM and others.

Graham Capital’s Mr. Tropin candidly explained that he doesn’t talk to clients as much as his investor relations employees. But he’s friends with hedge fund managers and other investors and “everybody is talking about macro because if you’ve been around investments for a while, you know that this is a good environment for macro.”

Global macro strategies can perform especially well during some periods, but years can pass between those phases, making returns “feast or famine,” said Sean McGould, CEO and chief investment officer at Lighthouse Investment Partners LLC, a $14.4 billion hedge fund in Palm Beach Gardens, Fla., that spun out of a multifamily office in 1999.

Once it became an independent firm and began taking outside capital, Lighthouse was able to grow, create a multimanager platform and recruit more portfolio managers and traders. It has 12 distinct teams right now that specialize in fundamental or systemic strategies focused on things like inflation, emerging markets and currencies, and it expects to have as many as 16 teams before the end of the year. The new hires were years in the making.

The lead times for the new hires at Lighthouse began well before this year, but the company’s rolling search for managers and strategies has nonetheless helped it perform and attract investors. Having many types of global macro strategies can smooth returns and make a global macro offering even more alluring, Mr. McGould said.

“If you can get it right, for institutional investors or individual investors, if you can produce a nice return stream that’s uncorrelated to other things they have in their portfolio, then that’s a home run,” Mr. McGould said.

Inflows to the Trium Larissa Global Macro Fund, part of the €750 million ($746 million) multimanager firm Trium Capital in London, have more than doubled this year, with total assets reaching €90 million. The new money has come primarily from institutional investors “who believe the opportunity set, in this more volatile market environment, will be good for global macro funds. We agree,” Donald Pepper, co-CEO at Trium Capital, said.