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There are several benefits to be reaped from investing in global macro funds. In today’s volatile market which is driven by momentum rather than fundamentals, this strategy can be a more attractive choice than equity hedge funds whose alpha results from single stock picking. With increasingly synchronised global economies, macro funds may be able to hedge out some of the systematic, top line factors that would otherwise create downside in long-only portfolios subject to beta. Unlike many other strategies which can not stomach high volatility, a good global macro manager should be able to make money in any market. On the other hand, macro funds are not constrained by a lack of volatility as a CTA would be.
We may also consider the operational reasons that global macro funds may be winners. There is less risk of insider trading with these funds, unless managers are complicit with government officials. I can sleep at night a little better feeling that communication leakages would tend to be less likely between the fund’s trader and the Bulgarian Minister of Finance, for example. Macro funds tend to be more liquid if they trade in currencies and use futures. They also may be more scalable depending on what they are trading. The foreign currency market is the most liquid in the world, and there may exist less potential for market impact from a large trade.
Yet every rose has its thorns. It is feasible to posit that global macro managers take on too many trades. You are paying a hedge fund manager for specialisation. A hedge fund is not the Vanguard 500 fund; more positions do not mean the merrier. If we think about perhaps the most famous trade of all time, Paolo Pellegrini’s short of the housing market, we can see the formula for success. The design was simple: he made millions from a large bet based on a thoroughly vetted rationale. It is observed that many trades may contradict or be redundant with each other, as the globalizing economies of the world move in lockstep. I was talking to a manager who went long the commodity currencies and the Euro but short the US Dollar. In the next breath, the manager said he was long US Treasuries against the Eurodollar without addressing the possible contradiction. The trade and choice of instrument (interest rate, currency, equities, commodities) should demonstrate consistent logic.
Following this rationale, it is possible to imagine that there may exist an intrinsically smaller investment opportunity set for this strategy type. It seems like every macro fund newsletter I read tells me the fund is short the Japanese Yen and long Gold. Although this strategy draws a stark contrast with others, there may be less potential for managers to distinguish themselves within their own bucket.
An allocator to these funds should grasp the ability to evaluate the hedge fund in relation to the investor’s long only portfolio. A transparent view of what the manager is doing is critical. There must be a way to match the hedge fund with the investor’s portfolio, or the benefits of hedging are unclear. A global macro fund may be likened to a multistrategy fund, if numerous instruments are traded (interest rate, currency, equities, commodities). It is useful to evaluate the alpha from each instrument for signals of the manager’s skill trading each type. A customised, direct basket of hedge funds can work better than an opaque fund of funds because the risks in the long only portfolio can be more directly balanced out using the global macro funds in the basket.
Manager selection is never about performance only. A diamond in the rough should display:
An economic view that is logical and compressed. The manager should be able to concisely articulate the key factors dictating what happens in the world, and be versant in what she sees as the catalysts that will govern results for the next 2-5 years. It only took one trade to make Pellegrini his millions, and his guiding rationale was simple: all over the world, people were living above their means.
Adept traders; somebody at the fund should have a solid trading background, and this is perhaps more critical than the need for a good economist. Trading is key here and must be done in a manner that is nimble, granular, and swift. Adept observers will make note of the trader’s acumen in handling trades of each instrument type, as they may vary from one transaction to the next.
A cynical manager who is convinced that the world is going to collapse. When someone spends a lot of time talking about the housing malaise or the latest unemployment report being so scathing, it signals a lack of foresight. You want to invest with the person who is looking forward and worried about the next crisis, and will die by the strength of her conviction that she knows how to trade a profit on it.
A modest manager. Only good swimmers drown and it is all too often that past performance does not repeat. For this reason, smaller or younger managers may have an edge because they might tend to be hungrier.
The information contained in this presentation contains confidential information regarding Diamond Oak Capital Advisors, LLC (“Diamond Oak”) and may contain information regarding hedge funds and other investments recommended or otherwise analysed by Diamond Oak. This document is not an offer to sell, nor the solicitation of an offer to purchase, any interest in Diamond Oak or any hedge funds or other investments discussed herein. An investment in any hedge fund or other investment discussed herein may be undertaken only through such fund or investment, may be speculative, and may involve a high degree of risk. An investor in hedge funds could lose all or a substantial amount of his or her investment.
Certain information contained in this presentation has been obtained from sources outside of Diamond Oak and its affiliates. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and neither Diamond Oak nor its affiliates takes responsibility for such information. Past, pro forma, hypothetical, projected, or suggested performance of any investment or portfolio of investments is not necessarily indicative of future performance.
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