Are macro hedge funds inherently untenable?

I'm very interested to get people's thoughts on this, especailly posters such as Bondarb.

There is a view among many renowned investors such as Klarman and Howard Marks that macro investing is futile because no one can accurately predict interest rates/global economy/geopolitics and other macro variables and consistently profit from that knowledge. Klarman argued in his seminal "Margin of Safety" that to be successful in macro investing, one has to nail both the general thesis AND the timing perfectly.

Marks has stated that investors should spend their time studying the "knowables": mainly micro variables such as industries, companies, securities. He believes that the more micro your focus, the more successful you will be. Oaktree does not make any macro bets, according to Marks.

Do you guys agree with this viewpoint? If one accepts their conclusion, how can we explain the performance of macro funds such as soros, Bridgewater, tudor, or even the macro quant funds such as oculus of DE Shaw? Are these funds just better able to predict the future? Or are their competitive advantage elsewhere?

 
Best Response

Macro guys, from what I've read about, take huge bets on very specific issues. Soros on currency pegs, Paulson on subprime lending. As a result, they often have very large swings up and down. Soros has had some massive losses. If you read "More Money Than God" which is a good book about hedge funds, all the macro guys are taking very specific bets and have had trades with huge losses as well a great ones. It's generally a very volatile strategy.

Bottoms up guys tend to be value oriented, they're all about not losing money. If you read Mark's book, he focuses a lot on risk and buying at a discount to make sure you have a "margin of safety" which is also what Klarman focuses on a lot obviously. They are more like the slow and steady poker players.

Neither is right, but it's my view that bottom's up is probably easier for an investor and most people in general because there are fewer variables and you can be more "certain" about the risks you are taking. If a stock can't go down any further because it's so cheap, just buy it and hold onto it until it goes up.

Macro guys tend to focus on timing things properly which takes investor psychology into account, which is a lot more difficult for most people.

Additionally, Marks and Klarman aren't saying you can't be successful in macro, they're saying it's much harder to be successful at it. There's probably no good "how-to" book on macro investing besides Alchemy of Finance because it's too complex a topic. On the other hand there are tons and tons about bottom up investing because it has a few very consistent principles.

 

Macro isn't entirely untenable, but a) it's extremely difficult to do macro properly; b) it's extremely easy to bullsh1t people about macro; c) most people who claim to be global macro aren't; d) as a corollary, there are extremely few people out there who have the ability to do proper macro.

As a strategy, top-down macro also requires very deep pockets, which very few investors in this day and age are willing to tolerate. The problem is that, unfortunately, the strategy became way too popular and fashionable for its own good after the crisis. As a result, the number of "macro tourists" has exploded to the point where it's become a little bit absurd. This is a v nice summary, btw, by Mark Dow, who actually came up with the term "macro tourist", AFAIK: http://markdow.tumblr.com/post/29342504820/why-are-global-macro-hedge-f…

So I am in agreement with the previous poster. The point isn't that top-down macro is impossible, but rather that it looks simple, but is actually very difficult to do properly in practice. As a result, lots of people claim to be able to do macro, but very few people can actually do it well.

 

i dont think macro is untenable or impossible...it is difficult but so is every strategy most of the time There is no free lunch. The fact that i have answered some form of this question on this board many times in the last year, as opposed to say, 2010, when the average question was more like "can you evaluate my trade idea in Aussie rates and if its good give me a job?" makes me more bullish on macro as a strategy then i have been in some time.

I do agree with the "macro tourist" thing and i see it all the time...there was a lot of style drift out there especially after 2007-2009 when macro did very well as a whole.

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

 
Bondarb:

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

Agree with you somewhat in that one of the advantages of macro (and what contributed to its popularity after the crisis) is the liquidity aspect (incl low balance sheet etc). However, having had a chance to observe a few macro strategies up close and personal, I would still say that the drawdowns involved are commonly a lot higher than fixed income RV etc. Obviously, this is quite subjective (and I am a bit biased) and I realize that it really depends on the mkt regime which is the cause of the drawdown. Just my Z$2c...
 
Bondarb:

i dont think macro is untenable or impossible...it is difficult but so is every strategy most of the time There is no free lunch. The fact that i have answered some form of this question on this board many times in the last year, as opposed to say, 2010, when the average question was more like "can you evaluate my trade idea in Aussie rates and if its good give me a job?" makes me more bullish on macro as a strategy then i have been in some time.

I do agree with the "macro tourist" thing and i see it all the time...there was a lot of style drift out there especially after 2007-2009 when macro did very well as a whole.

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

What is your focus in terms of asset class, Bondarb? I'm in my second month into a macro fund and still mind-boggled as to how much info we need to digest every day.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 
Bondarb:

i dont think macro is untenable or impossible...it is difficult but so is every strategy most of the time There is no free lunch. The fact that i have answered some form of this question on this board many times in the last year, as opposed to say, 2010, when the average question was more like "can you evaluate my trade idea in Aussie rates and if its good give me a job?" makes me more bullish on macro as a strategy then i have been in some time.

I do agree with the "macro tourist" thing and i see it all the time...there was a lot of style drift out there especially after 2007-2009 when macro did very well as a whole.

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

The Kovners of the past confronted markets that were trending insanely well nearly across the board, which was an optimal environment to make concentrated bets. In this era of compounding global central bank intervention that breeds risk-on/ risk-off gyrations across markets, it is almost imperative to make fairly diverse bets opposed to remaining highly focused, requiring a greater asset base. The same doesn't really apply to other hedge fund strategies that are inherently 'myopic'. Just my 2c.

 
Macro Arbitrage:
Bondarb:

i dont think macro is untenable or impossible...it is difficult but so is every strategy most of the time There is no free lunch. The fact that i have answered some form of this question on this board many times in the last year, as opposed to say, 2010, when the average question was more like "can you evaluate my trade idea in Aussie rates and if its good give me a job?" makes me more bullish on macro as a strategy then i have been in some time.

I do agree with the "macro tourist" thing and i see it all the time...there was a lot of style drift out there especially after 2007-2009 when macro did very well as a whole.

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

The Kovners of the past confronted markets that were trending insanely well nearly across the board, which was an optimal environment to make concentrated bets. In this era of compounding global central bank intervention that breeds risk-on/ risk-off gyrations across markets, it is almost imperative to make fairly diverse bets opposed to remaining highly focused, requiring a greater asset base. The same doesn't really apply to other hedge fund strategies that are inherently 'myopic'. Just my 2c.

One important thing to remember is that since "macro" offers so much room for creativity, it really is hard to generalize. For instance, Soros was known to basically buy equities to both generate returns outright and to fund large currency bets that didn't necessarily have a huge winning percentage but won big when they did win. By contrast, BW typically runs 40+ positions at a time and relies on its winning percentage to carry it over time--like how the casino counts on its winning percentage over time to make it profitable over time, even if it loses over shorter periods of time.

That said, it seems to me that the important thing with macro, as you mentioned, is to be fairly balanced and diversified. You typically want to have a good number of positions that are bets on different "things." For example: you might think that US Treasuries are overvalued relative to German bunds, the kiwi is likely to appreciate relative to the Aussie dollar, the Ruble is likely to depreciate relative to the Euro-USD basket the Russian central bank measures the Ruble against, the Japanese yield curve likely to steepen, and US cash clearing companies poised to benefit from rising interest rates will outperform the US equity market. These will all lead you to generate different exposures to underlying theses that are more or less only obliquely related: relative US/German yields, kiwi/Aussie monetary policy and capital flows, Russian monetary policy, Japanese inflation expectations and central bank flows, and the net interest income of US financial firms that hold lots of cash as US rates rise.

There is not necessarily a reason you would get crushed by central bank interventions in general unless you made your trades exclusively based on broad macro themes like "Fed tightening late 2013." Many "macro tourists" and similar traders do things like this, though. What they either fail to understand or understand only imprecisely, IMO, is 1) how to relate the pricing of financial assets to the underlying economy and 2) how to run a book with well-balanced portfolio exposures, a book that doesn't end up doing something like being massively long the USD by accident.

 
SlyGuy:
Macro Arbitrage:
Bondarb:

i dont think macro is untenable or impossible...it is difficult but so is every strategy most of the time There is no free lunch. The fact that i have answered some form of this question on this board many times in the last year, as opposed to say, 2010, when the average question was more like "can you evaluate my trade idea in Aussie rates and if its good give me a job?" makes me more bullish on macro as a strategy then i have been in some time.

I do agree with the "macro tourist" thing and i see it all the time...there was a lot of style drift out there especially after 2007-2009 when macro did very well as a whole.

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

The Kovners of the past confronted markets that were trending insanely well nearly across the board, which was an optimal environment to make concentrated bets. In this era of compounding global central bank intervention that breeds risk-on/ risk-off gyrations across markets, it is almost imperative to make fairly diverse bets opposed to remaining highly focused, requiring a greater asset base. The same doesn't really apply to other hedge fund strategies that are inherently 'myopic'. Just my 2c.

One important thing to remember is that since "macro" offers so much room for creativity, it really is hard to generalize. For instance, Soros was known to basically buy equities to both generate returns outright and to fund large currency bets that didn't necessarily have a huge winning percentage but won big when they did win. By contrast, BW typically runs 40+ positions at a time and relies on its winning percentage to carry it over time--like how the casino counts on its winning percentage over time to make it profitable over time, even if it loses over shorter periods of time.

That said, it seems to me that the important thing with macro, as you mentioned, is to be fairly balanced and diversified. You typically want to have a good number of positions that are bets on different "things." For example: you might think that US Treasuries are overvalued relative to German bunds, the kiwi is likely to appreciate relative to the Aussie dollar, the Ruble is likely to depreciate relative to the Euro-USD basket the Russian central bank measures the Ruble against, the Japanese yield curve likely to steepen, and US cash clearing companies poised to benefit from rising interest rates will outperform the US equity market. These will all lead you to generate different exposures to underlying theses that are more or less only obliquely related: relative US/German yields, kiwi/Aussie monetary policy and capital flows, Russian monetary policy, Japanese inflation expectations and central bank flows, and the net interest income of US financial firms that hold lots of cash as US rates rise.

There is not necessarily a reason you would get crushed by central bank interventions in general unless you made your trades exclusively based on broad macro themes like "Fed tightening late 2013." Many "macro tourists" and similar traders do things like this, though. What they either fail to understand or understand only imprecisely, IMO, is 1) how to relate the pricing of financial assets to the underlying economy and 2) how to run a book with well-balanced portfolio exposures, a book that doesn't end up doing something like being massively long the USD by accident.

i disagree with this diversification thing entirely...the best macro traders i have seen, and i have seen many good ones, run large concentrated positions in liquid products that they can easily exit if need be and have very few line items. When my book starts growing with different themes as you describe above it invariably leads to a drawdown. The sophistication is in the simplicity. To me most of the benefits of diversification are an illusion...when a big de-leveraging wave hits all the "smart" trades get hit across markets and the only thing that can save you is liquidity.

 
SonnyZH:
Bondarb:

i dont think macro is untenable or impossible...it is difficult but so is every strategy most of the time There is no free lunch. The fact that i have answered some form of this question on this board many times in the last year, as opposed to say, 2010, when the average question was more like "can you evaluate my trade idea in Aussie rates and if its good give me a job?" makes me more bullish on macro as a strategy then i have been in some time.

I do agree with the "macro tourist" thing and i see it all the time...there was a lot of style drift out there especially after 2007-2009 when macro did very well as a whole.

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

What is your focus in terms of asset class, Bondarb? I'm in my second month into a macro fund and still mind-boggled as to how much info we need to digest every day.

i focus mainly on G10 interest rates and FX.

 
Bondarb:
SlyGuy:
Macro Arbitrage:
Bondarb:

i dont think macro is untenable or impossible...it is difficult but so is every strategy most of the time There is no free lunch. The fact that i have answered some form of this question on this board many times in the last year, as opposed to say, 2010, when the average question was more like "can you evaluate my trade idea in Aussie rates and if its good give me a job?" makes me more bullish on macro as a strategy then i have been in some time.

I do agree with the "macro tourist" thing and i see it all the time...there was a lot of style drift out there especially after 2007-2009 when macro did very well as a whole.

The one disagree is that i dont think macro requires "deep pockets" relative to other strategies...the really old-school macro shops tend to run light balance sheet, good amounts of cash on hand, and have fairly small drawdowns relative to equity/long short, micro fixed imcome, and most other strategies.

The Kovners of the past confronted markets that were trending insanely well nearly across the board, which was an optimal environment to make concentrated bets. In this era of compounding global central bank intervention that breeds risk-on/ risk-off gyrations across markets, it is almost imperative to make fairly diverse bets opposed to remaining highly focused, requiring a greater asset base. The same doesn't really apply to other hedge fund strategies that are inherently 'myopic'. Just my 2c.

One important thing to remember is that since "macro" offers so much room for creativity, it really is hard to generalize. For instance, Soros was known to basically buy equities to both generate returns outright and to fund large currency bets that didn't necessarily have a huge winning percentage but won big when they did win. By contrast, BW typically runs 40+ positions at a time and relies on its winning percentage to carry it over time--like how the casino counts on its winning percentage over time to make it profitable over time, even if it loses over shorter periods of time.

That said, it seems to me that the important thing with macro, as you mentioned, is to be fairly balanced and diversified. You typically want to have a good number of positions that are bets on different "things." For example: you might think that US Treasuries are overvalued relative to German bunds, the kiwi is likely to appreciate relative to the Aussie dollar, the Ruble is likely to depreciate relative to the Euro-USD basket the Russian central bank measures the Ruble against, the Japanese yield curve likely to steepen, and US cash clearing companies poised to benefit from rising interest rates will outperform the US equity market. These will all lead you to generate different exposures to underlying theses that are more or less only obliquely related: relative US/German yields, kiwi/Aussie monetary policy and capital flows, Russian monetary policy, Japanese inflation expectations and central bank flows, and the net interest income of US financial firms that hold lots of cash as US rates rise.

There is not necessarily a reason you would get crushed by central bank interventions in general unless you made your trades exclusively based on broad macro themes like "Fed tightening late 2013." Many "macro tourists" and similar traders do things like this, though. What they either fail to understand or understand only imprecisely, IMO, is 1) how to relate the pricing of financial assets to the underlying economy and 2) how to run a book with well-balanced portfolio exposures, a book that doesn't end up doing something like being massively long the USD by accident.

i disagree with this diversification thing entirely...the best macro traders i have seen, and i have seen many good ones, run large concentrated positions in liquid products that they can easily exit if need be and have very few line items. When my book starts growing with different themes as you describe above it invariably leads to a drawdown. The sophistication is in the simplicity. To me most of the benefits of diversification are an illusion...when a big de-leveraging wave hits all the "smart" trades get hit across markets and the only thing that can save you is liquidity.

One thing I had learnt very early on due to the near detriment of my future employability is that liquidity is the only real hedge. Nothing else matters.

 
Martinghoul:

Thank gods for you macro guys' attachment to liquidity! Warms the cockles of my heart and pays my bills...

it is an obsession born of experience...liquidity preference for people like me definitely creates opportunities for others especially more micro relative value-type traders, but they are definitely taking on real risks to exploit those opportunities....sometimes the cost matches the opportunity, sometimes it doesn't, and sometimes the environment changes very rapidly getting them in big trouble while i can chance the course of my ship very quickly.

 
Bondarb:
Martinghoul:

Thank gods for you macro guys' attachment to liquidity! Warms the cockles of my heart and pays my bills...

it is an obsession born of experience...liquidity preference for people like me definitely creates opportunities for others especially more micro relative value-type traders, but they are definitely taking on real risks to exploit those opportunities....sometimes the cost matches the opportunity, sometimes it doesn't, and sometimes the environment changes very rapidly getting them in big trouble while i can chance the course of my ship very quickly.

Yep, indeed... Long may it continue, so that micro RV types like myself can provide the liquidity to the macro types like yourself. For the right price, of course.
 

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