Macro HFs vs fundamental HFs

I feel like WSO is dominated by bankers/fundamental equity HFs. Can you macro HFers out there give us some more color on what the opportunity is like? Specifically:
1. How many macro opportunities are there out there compared to fundamental equity funds?
2. What type of backgrounds do they favor(and would a FICC ST background be looked favorably upon)?
3. What is the comp and heiarchy like at a macrofund compared to the fundamental funds we hear about on WSO? It seems like macro funds give you the opportunity to take risk a lot earlier on. Does that inherently make the job more risky(one bad year and you're out?)
4. Where is the edge for macro funds and how do their performances compare to their fundamental counterparts? It seems like unless you're BW or Rentech, your fund is underperforming the market. Especially for funds that are not trading equities, where is your edge? It's not like you're invested in the equities market, where stocks generally rise over time. If you're investing in something like FX or commodites, the market seems more like a zero sum game.

Comments (19)

 
Apr 24, 2013 - 11:55am

http://www.wallstreetoasis.com/what-are-entry-level-hedge-fund-jobs-like

“...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Schopenhauer
 
Apr 24, 2013 - 1:14pm

Good link above. I find this topic very interesting and would like to know how macro guys view more fundamental equity funds and vice versa. I'm probably better suited to macro style using a fundamentals approach. But value / fundamental equity funds just seem more front and center and more standard path to break in (relatively speaking): The path seems more straight forward in that you spend time doing sell side ER -> asset management -> HF (or some loose variation), whereas macro seems to come from all backgrounds whether it is fixed income, FX, commodities, and maybe even equities to some extent? There seems to be less 'structure' as to how to pursue macro

Where I get confused is when some macro managers with a non-equities background (as an example) start talking about investing in stock x based on some macro theme. Does the specific stock recommendation come from an analyst in this case and does the PM trust the analyst enough to take his word on it? I would feel like I'm at a bit of disadvantage if I can see the macro theme in some underlying commodity and understand the industry, but haven't had time / experience modeling out a company from scratch and understanding the accounting nuances. I know no one can master anything, but how do PMs address the many nuances in all the different asset classes?

 
Apr 24, 2013 - 1:24pm

Accepted a summer position at a large macro HF so might be able to help.

1. Not sure what you mean by this, but I'm certain that liquidity across so many different asset classes will be higher at a macro fund who trades directional/spreads across FX, credit, commods, etc (even if 90% of trades are systematized). will open many more opportunities than at an exclusive equity shop (equities are also traded at the macro HF).

2. Majority of people I met through the recruiting process were rates guys, but this was my case. I for example come from a FIG M&A background therefore I'm certain they look at a wide range of people willing to learn/aren't scared of making mistakes/taking criticism.

3. Don't know, haven't been in one before. But at mine it seems like it is very flat (to an extreme) where PMs almost force us to speak what's on our minds. I'm sure this won't be the case at others though (heard Brevan Howard is the complete opposite from somebody working there).

4. If you're 'looking' for alpha returns it'll obviously be a zero-sum game. BW's Pure Alpha didn't perform well this year though, but if you take a look at their All Weather over the past few years it's been going through any type of environment with very steady risk/return ratios for investors. This fund is based entirely on rising/falling growth vs. inflationary expectations distributing the risk across the 4 environments (25% each), therefore it all balances out even in the toughest environments; with equities this is a lot harder to do IMO.

[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]
 
Apr 24, 2013 - 2:07pm

1. Depends... People have wildly different notions of what constitutes a macro opportunity.

2. FICC ST background is probably the most common, but there's interest in all sorts.

3. Hierarchy is normally no different to other HFs. It's important to realize that for every good macro hedge fund out there, there's a whole bunch of "macro tourists", who use "macro" as a collective term for all sorts of strategies, imaginary and real, that aren't really macro. If you're part of a fund like that, you probably will get to take risk earlier than in other places. And yes, that's risky, especially if you're a "macro tourist".

4. There's ever only two types of edge in the market. True macro funds' (e.g. BW) edge is the ability to forecast economic outcomes better than the market. That is extremely difficult to do properly and requires a LOT of very hard work. That's the reason why there's actually not that many true macro funds out there. Concurrently, it's reasonably easy to tell an interesting story and sound superficially intelligent, without the necessary level of detail. That's the reason why there's so many "macro tourists" out there.

 
Apr 24, 2013 - 10:01pm

Martinghoul hit it right on the head. I work at what he describes as a true macro fund, so take my opinion for what it is worth.

Many funds that are not pure macro funds trade macro both explicitly and implicitly. Lots of multi-strat funds will put on discretionary macro trades. And credit and l/s equity funds will often make decisions on how much to hold in cash or how much to ratchet up leverage which often explicitly or implicitly rely on macro views.

At the end of the day, generating alpha in macro is extremely difficult. It is hard for me to compare the difficulty relative to l/s equity and credit space b/c of my lack of experience (and I would not want to pretend to at the risk of being arrogant). What I can say is that there are only a handful of broad macro managers (across FX, equities, rates, spreads) whom I would trust with my money. There are probably a greater number of managers who specialize in a specific asset class. That said, there are also many very talented fund managers in their specialty (l/s equity, active, credit, et al...) who dabble in macro without a real clue and are in way over their heads (Paulson and Bass come to mind most clearly) who I would not never want to give my money to.

 
Apr 25, 2013 - 2:28am

SonnyZH, you just gave away where you'll be interning. Congrats on securing a gig there.

Totally agree on the recent preponderance of tourist macro funds, however macro is a very, very broad to the extent that the term implies much greater significance with regards to the asset classes traded opposed to the strategy itself. I work at a quantitative macro fund that utilizes minimal macroeconomic inputs but trades the entire FICC spectrum along with equity indices and other esoteric assets. Furthermore, not only are pure macro funds few and far between, they are almost non-existent. Bridgewater is no doubt a phenomenal fund, and while they definitely are a macro fund I wouldn't call them a pure macro fund given that their asset allocation is based on fully automated fundamental, technical and quantitative inputs. To me that represents the new frontier in hybrid macro, with All Weather being a risk parity fund.

Also, Global Macro has vastly outperformed every single hedge fund strategy by a huge margin. The next contender is distressed debt. Source: http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD

 
Apr 25, 2013 - 4:46am

I am not sure I would agree with the statement that Global Macro has outperformed everything else by a huge margin, tbh... No doubt that macro has been a very fashionable strategy and there are some good reasons for that. However, you have to take the swings in investor preferences with a large pinch of salt.

Specifically, regarding the performance of macro funds. Firstly, there are the usual problems and caveats that need to be considered when you look at the hedge fund indices. In particular, there's the usual survivorship bias, as well as the issue of only seeing raw returns, rather than the more important risk-adjusted numbers. Nevertheless, even with all of the above, looking at the very long time series for various HFR indices, I am seeing that, from inception (Jan 1990), the broad Macro category (HFRIMI) has underperformed both Equity (HFRIEHI) and EM (HFRIEM).

 
Apr 25, 2013 - 6:10pm

I had looked at the CS indices just a few months ago and global macro had strongly outperformed. I'll have to take another look. Most indices are plagued by immense survivorship bias, but I don`t think it is beneficial to normalize returns for variance given that these funds these funds have presumably been exposed to multiple business cycles.

Edit: According to Credit Suisse Tremont, Global Macro has strongly outperformed, followed by Event Drive- Distressed and Emerging Markets with the inception date being April 1994. HFRI Indices may tell a different story, but I believe that is attributable to their constituent funds rather than the start date. Will need to investigate this.

 
Apr 26, 2013 - 4:48am

Yeah, could be just the index construction methodology...

Generally, macro strategies certainly have their merits, but I find that they've really become a little too fashionable of late, both among end investors, as well as the aspiring traders. I think there's quite a lot of misunderstanding in these communities about what macro actually means and how much hard work it actually entails.

 
Apr 26, 2013 - 4:04pm

Interesting thread. Would you guys mind expanding on what 'actual macro' means and how "macro tourists" compares, maybe with an example of each?

I understand the jist of what you guys are saying, but I'd fall in the category of finding macro interesting, but not really understanding the depths of it, so I'd probably be the 'tourist' guy...

 
Apr 27, 2013 - 12:13pm

http://www.barclayhedge.com/research/indices/ghs/mum/HF_Money_Under_Management.html
It looks like macro funds/multistrat/CTAs (I consider them all to be more macro funds than macrofunds) have as much if not more AUM than your typical microfunds(L/S equity, distressed, even driven...)

I feel like there is a significantly larger presence of banking/fundamental/micro HF on WSO, which is unfortunate because it gives me the impression that there are no opportunities out of S&T/macro funds.

Also, if you're in S&T now, how do you make the move to a macro fund? I know there are plenty of headhunters that recruit into l/s equity, distressed, event driven funds but what about macro funds? Hopefully, the S&T guys/macro fund guys are more vocal in WSO and provide us some more color.

 
Apr 27, 2013 - 12:15pm

confused23:

http://www.barclayhedge.com/research/indices/ghs/m...
It looks like macro funds/multistrat/CTAs (I consider them all to be more macro funds than macrofunds) have as much if not more AUM than your typical microfunds(L/S equity, distressed, even driven...)

I feel like there is a significantly larger presence of banking/fundamental/micro HF on WSO, which is unfortunate because it gives me the impression that there are no opportunities out of S&T/macro funds.

Also, if you're in S&T now, how do you make the move to a macro fund? I know there are plenty of headhunters that recruit into l/s equity, distressed, event driven funds but what about macro funds? Hopefully, the S&T guys/macro fund guys are more vocal in WSO and provide us some more color.

Bump

Edit: Happy to see this discussed at such length

 
Apr 27, 2013 - 4:32pm

confused23:

http://www.barclayhedge.com/research/indices/ghs/m...
It looks like macro funds/multistrat/CTAs (I consider them all to be more macro funds than macrofunds) have as much if not more AUM than your typical microfunds(L/S equity, distressed, even driven...)

I feel like there is a significantly larger presence of banking/fundamental/micro HF on WSO, which is unfortunate because it gives me the impression that there are no opportunities out of S&T/macro funds.

Also, if you're in S&T now, how do you make the move to a macro fund? I know there are plenty of headhunters that recruit into l/s equity, distressed, event driven funds but what about macro funds? Hopefully, the S&T guys/macro fund guys are more vocal in WSO and provide us some more color.


If you look at the time series of AUM for all these categories, you'll see that the increase in macro fund AUM (at the expense of other strategies) is very much a post-crisis phenomenon. Some of that is due to an understandable flight to liquidity, but, above and beyond that, the inflows have been a little too bubble-like. Also, I am not sure I would lump CTAs into the macro category, in spite of some common features.

As to how to get into a macro fund, all the HH calls I get these days are for macro mandates, so there's definitely a lot of recruiting going on.

 
Apr 27, 2013 - 8:30pm

Fun thread. For me, the thing that impresses me most about successful macro guys is that 1) they can forecast macroeconomic environments (this is REALLY hard) 2) they can find a way to actually execute their views. Even if you can somehow forecast your favorite macro statistic the market might do something else entirely and be oblivious to it.

re: all-weather--does anybody think there is magic in risk parity portfolio construction, or did it just simply ride a great fixed income environment by levering up that portion of the portfolio?

 
Apr 28, 2013 - 5:40am

syntheticshit:

Fun thread. For me, the thing that impresses me most about successful macro guys is that 1) they can forecast macroeconomic environments (this is REALLY hard) 2) they can find a way to actually execute their views. Even if you can somehow forecast your favorite macro statistic the market might do something else entirely and be oblivious to it.

re: all-weather--does anybody think there is magic in risk parity portfolio construction, or did it just simply ride a great fixed income environment by levering up that portion of the portfolio?

What portion? Inflation-indexed bonds? The All Weather's advantage is that it balances out in every environment, no magic... May look like magic because 1) Majority of HNWIs don't know how to invest (either inherited the money or were successful in creating a business) which leads to 2) Allocate their assets to 'traditional' PBs/asset managers who 'balance' risk by going in 70% equities, 20% alternative investments and then a remaining 10% to fixed-income for the sake of it. It's clearly the wrong approach seeing they can get seriously burned out in many different types of environments (basically when equities don't perform well).

[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]
 
May 5, 2013 - 2:40am

SonnyZH:

syntheticshit:

Fun thread. For me, the thing that impresses me most about successful macro guys is that 1) they can forecast macroeconomic environments (this is REALLY hard) 2) they can find a way to actually execute their views. Even if you can somehow forecast your favorite macro statistic the market might do something else entirely and be oblivious to it.

re: all-weather--does anybody think there is magic in risk parity portfolio construction, or did it just simply ride a great fixed income environment by levering up that portion of the portfolio?

What portion? Inflation-indexed bonds? The All Weather's advantage is that it balances out in every environment, no magic... May look like magic because 1) Majority of HNWIs don't know how to invest (either inherited the money or were successful in creating a business) which leads to 2) Allocate their assets to 'traditional' PBs/asset managers who 'balance' risk by going in 70% equities, 20% alternative investments and then a remaining 10% to fixed-income for the sake of it. It's clearly the wrong approach seeing they can get seriously burned out in many different types of environments (basically when equities don't perform well).

Balancing across environments is nothing more than being equal weight across a set of asset classes and constantly rebalancing over regular intervals. Bridewater launched the All Weather fund in 90s which was and still is a variant of the Permanent Portfolio introduced by Harry Browne. Basically one has to remain "balanced" across four environments: rising growth, falling growth, inflation and deflation. How? Equally allocate (25% each) across equities (rising growth), fixed income (falling growth), gold (rising inflation) and cash holdings (deflation). Nothing particularly sophisticated and the fixed income and gold components have hit the ball out of the park as of late, however I believe it still leaves much to be desired, most likely isn't sustainable and most certainly isn't a sole competitive advantage.

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