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07-11-2015, 06:55 AM
- Nov 7 2015 at 12:15 AM
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[img=620x0]http://www.afr.com/content/dam/images/g/k/q/r/r/9/image.related.afrArticleLead.620x350.gkqrpz.png/1446781861067.jpg[/img]Guy Stern's main message is that even long-term investors need to reconsider how they achieve their investment returns, as equities aren't going to "bail you out". Christopher Pearce
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by Jonathan Shapiro
Ever since George Soros broke the Bank of England in 1992, the allure of the macro hedge fund has loomed large. The ability to foresee major shifts in the global macroeconomy and make big profits has inspired a generation of prospective "macro kings".
The problem is that while billions have been raised to trade the big-picture trends, only a few managers have consistently made money for clients.
Yet as 2015 has brought more high-profile hedge fund closures, some of the world's oldest asset managers are doing "macro" their own way.
And judging by the numbers they're doing it well.
[img=620x0]http://www.afr.com/content/dam/images/g/k/q/r/w/x/image.imgtype.afrArticleInline.620x0.png/1446781379463.jpg[/img]David Millar says, after meeting with Australian regulators, he was reassessing whether it was time to pull stumps on the derivatives trade. Supplied
Take the 190-year old Edinburgh-based Standard Life Investments, which is among the best proponents of macro of multi-strategy investing. Headed by highly regarded fund manager Guy Stern, the multi-asset and macro investing team oversees a staggering $250 billion dollars of assets under management.
The Global Absolute Strategies fund has returned 9.32 per cent a year, net of fees, since December 2009 for Australian-based institutional investors.
The fund's "edge" over hedge fund equivalents, Stern believes, is patience.
TEAM AVOIDS 'MYOPIA'
"Where a market or currency will be at the end of the year is very random," he tellsThe Australian Financial Review.
"Our success is extending that time horizon just a little. Over three years, your ability to be right about your forecast gets much better."
This longer-term approach helps Stern and his team avoid the "myopia" that can set in from being glued to Bloomberg trading terminals.
"The market is seductive. It draws you in. You want to see the latest move, or news, and whether is it going to change how the Fed is going to respond," he says.
Stepping back, and "not trying to pick what happens next" can give the investors a "tremendous advantage".
Stern's main message is that even long-term investors need to reconsider how they achieve their investment returns.
In a world of modest economic growth, equities aren't going to "bail you out."
INVESTORS MUST FIND OTHER WAYS
That means investors have to find "other ways to make money" that aren't related to the broader market direction.
"These are all areas that are traditional in nature, but we are using them slightly differently to generate return [in a way that is not] dependent on whether economic growth occurs," he says.
One source is currencies, which trade relative to one another. This makes the asset class a directional bet rather than an investment – and one that has tripped up many traders.
But Stern believes that over the long run, currency positions can pay off. "You have to find the fundamental reason why one currency would appreciate against another, but doing it on a daily basis is difficult."
Another source of returns lies within fixed income markets, for example, trading "interest rate curves", which is taking advantage of apparent mispricings in the bond market that are not correlated to broader market moves.
A third alternative is "relative value" trades – identifying relationships in two assets classes that will either "break down or revert".
"It could be one market of equities, or one region of government bonds versus another. If I buy European versus US bonds, I am not taking a directional exposure – I just want the separation."
Stern says the fund will not be swayed in its positioning by the actions of other investors.
"When I look at the portfolio now, I don't think its [either] 'momentum' or 'contrarian'. We have a mix of those kinds of strategies. I have no problem being in crowded positions."
He's happy to invest in a corporate debt, even though it's universally owned. Yet as other funds have avoided European stocks, he's buying.
"The market in European equities is different to the European economy.The return environment is better than most other places in the world."
'MACRO IS NOT EASY'
A little further south of Edinburgh in the picturesque town of Henley, David Millar jointly heads up Invesco's Wholesale Global Targeted Returns Fund.
Millar, a former bond trader who had previously worked with the team at Standard Life, is deploying a macro approach within the 80-year old US funds management giant..
The $US9.3 billion ($13 billion) fund has returned 12.36 per cent on a cumulative basis since setting up in December 2013, with a third of the volatility of the equity market.
Millar and his team can pretty much go anywhere in the universe of tradeable securities for ideas that will make money.
"Macro is not easy. Looking for unconstrained ideas is the hedge fund approach, but if you're going to do that, you need to manage the risks and diversify," he says.
"The macro universe is a broad church. I always portray it delivering "cash plus five per cent", but with less than half the equity volatility."
Invesco's fund acts like a macro hedge fund except for one notable difference. There's no secrecy around its big bets.
They're all out in the open – all 21 trades or ideas are fully disclosed to investors and the world through a periodic report. In credit, currencies, equity, interest rates and volatility, the fund explains the rationale of its long Swedish bonds over Europe bonds, trading US large caps over small caps and selling the renminbi to buy the rupee.
Not every trade goes its way.
AUSTRALIA – A HOT BED OF OPPORTUNITY
"We were long Norwegian krona versus British pound during a 50 per cent fall in the oil price. That doesn't feel very good, but you go back to the process. On the other hand, we kept on those US duration [bond] ideas in a conditional way and stayed long bonds until January this year and that's a lot longer than those macro kings."
Several of the fund's macro trades relate to Australia – a hot bed of opportunity given we actually have positive interest rates, compared with the flatlines at zero in other major markets.
One of its trades has been to invest in derivatives that will make money if Australian short-term interest rates fall.
But when Millar met with the AFR Weekend on the day Westpac lifted its home loan rates, he said that after meeting with regulators, he was reassessing whether it was time to pull stumps on that trade.
"It's interesting to see if Australia can evolve from an exporter [to China], to an importer of the consumption phase – the depreciation of the dollar is important. But it does show that some of those trades might be at their end, because of the realignment of the Australian dollar."
Another successful position that the fund has held over many months was bet on more volatility in the Australian dollar versus the US dollar.
The world was saying the Aussie dollar has no more volatility than the US dollar. Even the man in the street in the UK watching the exchange rate knows the Aussie dollar is more volatile."
CENTRAL ECONOMIC THESIS REVIEWS
While Millar, as a fixed income trader, has a cautious bias, others in his team tend to be more optimistic. The fund reviews its central economic thesis once a month.
"When we set out, we were told our central view is too cautious and now we're being told we are 'consensus' but we've not changed our view."
Stern, meanwhile, believes that while markets are challenging, they're no more tenuous than at any other time. "The market risks are always there and I don't see it as more or less challenging, risky or dangerous," he says.
"We are in abnormal times without question. There've been very few periods where you can look forward to positive but below-trend growth, and that's what we are going to see."
That is a problem for Australian funds, which Stern says may appear forward thinking in their approach to risk management, but at the same time they are betting almost everything on the equity market's prospects.
"You are counting on 80 or 90 per cent of your returns to be delivered from economic growth and embedded risk premium in equities; and if you don't get that, you're stuffed."
