By Carolina Mandl and Nell Mackenzie
NEW YORK/LONDON Many macro hedge funds that bet on global economic trends are ending the first half of 2023 with losses, but uncertainty around how different central banks will handle monetary policy could provide trading opportunities for the rest of the year.
After a surprise crisis of regional U.S. banks roiled markets, those funds were down by 2.3% this year through May according to the HFRI Macro (Total) asset weighted index, which tracks performance of hedge funds betting on macro trends. Investors said some individual performances suggest it may be difficult for many funds to fully recover by the end of June. That performance compares with a gain of roughly 13% for the S&P and 0.1% for benchmark performance for hedge funds.
"The one weakest spot for hedge funds this year has been the macro managers," said Jeffrey B Klein, a managing director at Goldman Sachs External Investing Group, which invests in hedge funds. "For the rest of the year, there could be a lot of opportunities in the macro space because there'll be different economic policies followed in different countries. Central banks may not follow as much of a coordinated policy as they have over the last number of years with very low interest rates."
Hedge funds that bet on stock performance were up year to date but on average still underperformed the broader indexes, according to a Goldman Sachs report.
While central banks around the world were in sync last year and for most of this year raising rates to fight inflation, most recently monetary policy has varied. The U.S. Federal Reserve decided to pause its hiking strategy in its latest meeting, but the Bank of England surprised investors last week with a rate hike above expectations and some emerging countries like Brazil are already considering a rate cut.
This divergence gives portfolio managers more trading opportunities, investors said.
"Last year, the market was largely driven by those macro overhangs, so you had these long lasting positions, kind of short rates and long dollar. It was the gift that keeps on giving it," said John Delano, managing director at asset management firm Commonfund, which invests in hedge funds.
Assets from different countries are more likely now to move in different directions, he said. Currency moves are increasingly out of sync.
Some of the biggest macro hedge funds are Bridgewater Associates, Brevan Howard and Moore Capital.
Some of the money-losing funds rely on active managers instead of algorithms for trading. Haidar Jupiter ended May down 44%; Brevan Howard Alpha Strategies was down 1.99% and Rokos was down 5%. The firms declined to comment on the matter.
Last year, with bets that interest rates would remain higher for longer to tame inflation, macro portfolio managers had gained about 14% in the first half of the year and ended 2022 up about 9%, according to HFR, outperforming the benchmark.
A regional banking crisis, however, caught portfolio managers off guard in March, bruising their bearish rates positioning right after Federal Reserve Chair Jerome Powell told lawmakers the central bank might have to raise rates higher than expected to tame inflation.
Some hedge funds retrenched. London-based hedge fund Rokos Capital Management decided to de-risk in March after it lost 15% with the volatility in the bond market. In May it posted a 5% gain, but it was still down 5% year to date.
POSITIVE PERFORMANCE
Contrary to the performance in macro hedge funds, long/short hedge funds, which bet on rises and falls in global stocks, were up 5% as of June 23, Goldman Sachs said in a note to clients. That still underperformed the rise of about 10% in MSCI's broadest index of global shares.
Hedge funds aggressively bet that stock prices of U.S. companies would fall in June while remaining net bought on European markets, said a separate note from Goldman Sachs sent the same day.
Delano said equity hedge fund managers have been more cautious in terms of betting on a market direction in the first half of the year. "You could call it a low conviction that this market rally was going to continue," he said.
Investors expect long/short hedge funds to end the year on a positive note, as the impact of an environment of higher rates is going to impact companies in different ways.
Current market conditions have meant a big gap between the best and worst performing stocks. This provides great opportunities for hedge funds, said Bruno Schneller, a managing director at INVICO Asset Management.
(Reporting by Carolina Mandl, in New York and Nell Mackenzie, in London; Editing by David Gregorio)