I also predict it will be a good year for sports bettors who can correctly pick the teams that will beat the point spread. But what that has to do with asset allocation of an investment portfolio is not very clear to me.
The WSJ reports that for the hedge fund crowd 2007 may be a good year for “macro strategies “:
Betting on the world's broad economic trends tripped up some high-profile names in the hedge fund industry last year, but such "global macro" investing is poised for a comeback this year, money managers say.
Here’s the convoluted “logic” behind the assertion.
Global macro was among the first widely practiced hedge-fund strategies. It helped popularize these private-investment vehicles after money managers George Soros, Julian Robertson and other early practitioners saw stellar returns by betting on economic trends via investments in currencies, interest rates, shares and other instruments.
In other words because some exceptional individuals made some extraordinary profits during the 1980s and 1990s this “strategy” of diving developments in global markets and staking massive positions on their hunches is likely to come back. No matter that post these traders posted big losses in the late 1990s and closed down their funds. Both have been cited as stating the markets are no longer well suited to the strategies they implemented
Stunningly the article goes on:
The strategy hit a rough patch last year because the world's economies have been relatively calm, gently rising more or less in unison. Moreover, many global-macro investors were caught short by the resilience of the U.S. economy, which they had bet would be weaker than it was. Global macro, like other hedge-fund strategies, profits from bets on big swings, or volatility. If things don't go up or down much, there isn't much money to be made, whether betting on pork bellies or the price of the euro versus the yen.
This year could be different, as many economists predict volatility after an extraordinary period of relative calm.
Now there’s a paragraph and a half of nonsense. The macro strategy didn’t perform poorly because the US market was calm, it performed poorly because it expected the US stock market to go up and it went down. As for their much needed volatility, it was far from absent in 2006: emerging markets took a 20% tumble in the spring before ending the year up over 20%, Chinese stocks nearly doubled as did those in India, oil hit $80 the rest of the energy sector had unprecedented volatility, gold silver and copper had massive bull runs and corrections (i.e. major volatility) and some agricultural commodities hit multi year highs. In other words it wasn’t the lack of volatility that prevented the macro managers from accruing big profits….it was their inability to predict the moves and profit from them.
But hope springs eternal:
Hedge-fund investors surveyed by Deutsche Bank AG are predicting the strategy will be the second-best performer this year, after the plain-vanilla strategy of buying some stocks and shorting others (selling borrowed shares in hopes of replacing them with cheaper ones later and pocketing the difference). About two-thirds said they currently were invested in macro funds, and one-third said they would add to their global-macro exposure in 2007.
And here’s a bit of analytic brilliance from the WSJ
These funds typically have seen their best performances around times of market crises, but they also see their worst performances in such years when managers bet wrong.
In other words the funds make big profits when the managers bet right and suffer big losses when the managers bet wrong….
In other words, when you “invest” in a macro strategy hedge fund you’re really just betting on a “genius” to hit a home run while you’re invested
Allocating funds to the global macro strategy is not really an allocation to an asset class such as fixed income, international stocks or domestic large cap stocks; it’s simply a bet on a “superstrar”
Reading between the lines of the following quote makes this quite clear:
"The real struggle is not how much you want to invest in global macro, but who you allocate to," says Nicolas Campiche, chief executive of Managers Selection Services at Swiss private bank Pictet & Cie., which has about $20 billion invested in hedge funds. Last year, the average return of global-macro funds in Picket’s portfolio was about 10%, yet the results of those funds ranged from a 10% loss to a 44% profit.
And what does one get as the payoff from these superstar bets:
Overall, global-macro funds registered an average return of 8.23% in 2006, compared with a 12.88% gain on Chicago-based Hedge Fund Research Inc.'s composite index of hedge-fund returns and a 13.6% rise in the Standard & Poor's index of 500 big U.S. stocks….
Some global-macro funds managed to generate strong profits last year. New York-based Drake Management LLC returned 41% on its Drake Global Opportunities Fund, in part by betting against U.S., U.K. and Japanese government bonds, the Icelandic krona and the New Zealand dollar in the first half of 2006.
Hmmm…most macro hedge funds fared poorly in 2006 because there was lack of volatility (except in obscure areas like gold, oil, copper and Asian stocks). But some exceptional (or exceptionally lucky) managers found enough volatility to make profits by trading the Icelandic and New Zealand currencies….
But 2007 will be a good year for more macro managers because there will be big macro developments in the world economy which only a few genius managers will identify and successfully exploit for big profits.
….don’t bet on it.
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