Macro hedge funds turn in banner year in volatile market

Hedge funds have always been a bright spot for investors, even when the market is gloomy.
Hedge funds have always been a bright spot for investors, even when the market is gloomy.

Summary

Biggest interest-rate and currency moves in decades fuel gains after years of subpar returns

Hedge funds that bet on macroeconomic shifts have been a rare bright spot in a dismal market, racking up their highest returns in years on the back of some of the biggest interest-rate and currency moves in decades.

So-called macro firms such as Bridgewater Associates and Brevan Howard Asset Management, which try to anticipate moves across financial markets such as the direction of interest rates, currencies, equities and commodities, are enjoying double-digit gains at a time when both stocks and bonds are swooning and gold has dropped, too. The S&P 500 is down a total 23.9% so far this year, including dividends, and hedge funds on average have lost about 4% for the year through Sept. 23, according to early estimates.

Macro managers say opportunities abound as central banks around the world boost rates at varying paces to combat surging inflation, setting off a cascade of big moves in currencies and stocks. That stands in stark contrast to roughly a decade of globally coordinated easy-money policies that fueled equities markets but damped volatility broadly, leaving macro investors with little to do. Many investors gave up on the strategy amid years of subpar returns.

“It’s been a perfect storm," said Herman Laret of Stamford, Conn.-based Titan Advisors, which invests more than $4 billion of client money in hedge funds and has maintained investments in macro funds. “There’s so much going on at the moment, whether it’s geopolitical, central-bank-policy divergence, big moves in rates, big moves in FX—I have not seen a more favorable macro backdrop."

A belief that the U.S. Federal Reserve would boost rates faster than its peers around the world has been an animating force behind many funds’ gains, also inspiring winning wagers that the U.S. dollar would strengthen against currencies like the euro, British pound, Japanese yen and Chinese yuan.

Westport, Conn.-based Bridgewater Associates, the world’s biggest hedge fund with about $150 billion under management, is on pace to notch its best year since 2010; its flagship hedge fund, Pure Alpha, gained 32.7% after fees through Sept. 23 in the share class allowing for higher volatility, said people familiar with the firm. Investors said gains came from bets including bullish commodities positioning coming into the year that benefited from Russia’s invasion of Ukraine, bets early in the year that rate increases in the U.S. would come in faster or to a higher level than widely expected, currency trades and bearish equities positioning.

Bridgewater during the pandemic began studying when policy makers hit “constraints" that would prevent the maintenance of easy-money policies, said Bridgewater co-investment chief Greg Jensen. Bridgewater identified bubbles in financial markets, inflation and currency problems as constraints in a framework that, coupled with its systematic data, helped the firm nail an early call that inflation wouldn’t be transitory, and that significant tightening would occur.

Brevan Howard’s nearly $10 billion flagship fund was up about 21% for the year through Sept. 23, according to people familiar with the firm. Rokos Capital Management gained about 35% in one of the share classes for its hedge fund, while the $13 billion Caxton Associates had a gain of about 15.5% for the period in its flagship fund, said investors.

Meanwhile, Key Square Capital Management, a $1.5 billion macro firm founded by a former investment chief for George Soros, gained 25% for the period in its main fund and 45% in a more levered fund, said a person familiar with the matter. Wagers on a stronger dollar versus currencies like the euro, pound and yuan have made up a significant portion of the firm’s gains.

The pace of change in monetary policy around the world recently has been extraordinary, said Kenneth Tropin, founder of the $19 billion Graham Capital Management in Rowayton, Conn. It is posting returns of between 25% and 35% this year through Sept. 23 in its main fundamental and quantitative macro funds, said people familiar with the firm.

Mr. Tropin cited as an example the European Central Bank, which has raised its policy rate by 1.25 percentage points since July from a negative 0.5% rate after not boosting for 11 years; it is expected to institute further increases this year. The U.K.’s moves have been even more dramatic, with the Bank of England boosting rates by 2.15 percentage points since December; it is expected to hike by a further 3.5 percentage points by mid-2023.

On Monday, the pound hit its lowest-ever level against the dollar on news of the government’s plans to cut taxes. After days of market tumult, the Bank of England on Wednesday said it would buy U.K. government bonds with long maturities “on whatever scale is necessary"—a shift for an institution that is gearing up to sell down its bondholdings.

Investors in the next 24 months should expect more of the kind of whipsaw cycle highlighted in the U.K. recently as policy makers react to high rates with efforts like sweeping tax cuts, sparking market fallout and new moves by policy makers, Mr. Jensen said. “So much has happened over the last six-to-nine months, but we still think we’re only in the middle of that tightening."

This story has been published from a wire agency feed without modifications to the text.

 

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