"Return of the mack, Once again
Return of the mack,
Top of the world,
Return of the mack, Watch my flow,
You know that I'll be back Here I go."
Mark Morrison, Return of the Mack
Global Macro, one of the classical hedge fund strategies, has seen a sharp resurgence in recent months. After several years in the shadow of falling global volatility and underperformance relative to beta-driven strategies, global macro managers are all of a sudden ‘back in play’. As a new rendition of Mark Morrison’s “Return of the Mack” hit the charts last year, you may have overheard global macro investors humming the chorus with a rejuvenated enthusiasm.
Looking at data over November and December, the performance across peer group shows that the opportunity set has exploded for macro traders. This comes after many years of frustratingly low interest rates, low inflation, and synchronous monetary policies including widespread quantitative easing. Indeed, when the original version of Morrison’s classic track was released in 1996, it was the glory days of macro investing, with the 90’s backdrop of higher economic dispersion, higher interest rates and higher inflation, all helping macro funds notch up stellar performance years.
Could we be returning to a golden age for the strategy? Quite possibly.
Brexit and Donald Trump in the White house are two of the most dramatic political events we have seen, arguably for several decades. It is not the events themselves, however, that have macro traders excited, but the ongoing structural change that is expected to follow. Coinciding with these developments is the end of ultra-loose monetary policy in the US, which has been a fierce headwind for this strategy since the recovery post-2008. Irrespective of one’s political views, there is little doubt that the next few years will provide an investment landscape that will be very different to the one we have seen in recent years.
Asset managers - particularly those in the alternative arena - are paid to generate returns ‘irrespective’ of market direction. For many years, however, it has paid to be long risk-assets in traditional strategies and ride through the intermittent volatility. Brexit and the Trump administration (as we are already seeing) are catalysts to affect change across the markets and include areas such as: new fiscal policies, trade agreements, de-regulation, overhaul of the tax code, repatriation, a shift in energy policy, and heightened geopolitical risk. There are only a handful of strategies that can benefit from such change to the extent they did in the 90s: chief amongst these is global macro.
In the past, global macro has often seen times when it has fallen in and out of favour for alternative or ‘absolute return’ investors. Leading up to the 2008 financial crisis, investors preferred to direct capital to ‘beta-heavy’ strategies such as long/short equity, event-driven, and long credit to capitalise on rising markets and tight spreads. While there were a few standout managers within each of these strategies that saw the financial crisis and prepared for it, most suffered large losses in 2008. The strategies that stood out the most in 2008 were global macro and trend-following CTAs. Many macro managers anticipated the impending crisis and were able to move their exposures around quickly to generate strong gains both throughout the crisis and in the aftermath. In today’s world of instant information, live telecasts, ‘big-data’ and the age of Twitter, markets are responding quicker than ever. The skill and ability of macro managers to adapt to this dynamic, ever-shifting landscape is likely to be very valuable over the next few years.
Global macro should not be viewed as an insurance play – a common misconception within the industry and amongst allocators. While the strategy did stand out in 2008, where it really thrives is during periods of significant political and economic change. With Brexit, the Trump Presidency, the US Federal Reserve hiking rates, as well as upcoming elections in Europe, there are a plethora of events and potential trade ideas for managers to develop and trade in 2017 and beyond. Over the past few weeks macro funds have already profited on what has become known as the ‘Trump trade’; while many didn’t predict the election win, they were quick to adjust portfolios in line with his well-advertised policies and lock-in strong gains over November and December. As well as a very vocal election campaign, Trump had published all of his campaign policies on the internet, covering infrastructure, tax, immigration, energy and education – amongst others – for everyone to see. For example, several macro funds immediately initiated positions to benefit from rising US interest rates, which saw large gains as Trump’s pro-inflation policies led to a more hawkish tone during Governor Yellen’s December press conference.
While not all of Trump’s policies may come to fruition, active macro funds should be able to trade around sentiment as markets over and undershoot as his Presidency evolves. The important policies that actually become law, will likely have multi-year implications for a whole range of assets. As such, shorter-term trading- oriented macro funds should benefit (trade the tweets!) as well as longer-term thematic macro funds.
As we watch this mini-resurgence of global macro, it is unlikely that the ripple effects of Brexit and Trump will go away any time soon. In fact, we may have only seen the beginning of new regime shifts that will last well beyond 2016, as implications of these events begin to feed into the real economy. While we have seen a few false dawns for the strategy in the past, this time it does seem that 2017 could really be the Return of the Mac.