Return of the macro warrior

Wed Apr 4, 2012


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The art of successful hedge fund investing has always been to balance carefully the subtleties of the strategies they were mixing and knowing what would trigger their dark side to emerge, when and for how long


By Niki Natarajan

When Carl Gustav Jung first articulated the idea of archetypes in the human persona, he could not have foreseen the emergence of the hedge fund industry's own archetypal derivatives: gold (sage or wise man); global macro (warrior); equity (hero); arbitrage (advocate); fixed income (mentor); commodities (alchemist); and currency (temperamental child).

An archetype is a universally understood symbol or pattern of behaviour that is copied by others and so not too dissimilar to the strategy buckets into which investors typically put different types of hedge funds.

Like the light or good and shadow or bad sides of Jungian archetypes, so too hedge fund strategies display their positive and negative tendencies depending on the environment they find themselves in.

The art of successful hedge fund investing - as recorded by many of the 20-year-old FoHF veterans  - has always been to balance carefully the subtleties of the strategies they were mixing and knowing what would trigger their dark side to emerge, when and for how long.

In history, archetypes - such as kings, pirates, warriors and martyrs - come and go depending on the prevailing politics of the period. The late 1980s and 1990s were times where the hedge fund legends were warriors locked in combat re-writing the manuals on the art of investing. Warriors such as George Soros, who broke the Bank of England in 1992, Louis Bacon, Bruce Kovner, Julian Robertson and Michael Steinhardt led the charge of the golden age of global macro. Some, like Bacon, still live to tell the tale; others, like Soros, have hung up their boots; while those like Kovner and Robertson have trained a new elite band of warriors ready - in theory at least - for war.

And it seems - if the latest slew of prime broker surveys on investor sentiment are to be believed - that the time has come once again to harness the warrior energy of global macro for the turbulent times ahead. Thirty nine per cent of Deutsche Bank's investors see money going into global macro in 2012, while 45% of the Credit Suisse investors have global macro on the top of their buy list.

So why is global macro in such demand, especially as global macro is not particularly on form performance-wise yet this year? Investors typically invest with a rear-view mirror and in 2011 when the global hedge fund industry was down 4.44%, the global macro universe was one of the few strategies that was up, returning 1.88%. This also resulted in global macro being the most popular strategy for new fund start-ups in 2011, according to the latest HedgeFund Intelligence Global Review.

But rear-view investing is only a small part of the equation. Even the savvy investors are poised for war as the world has entered a period dominated by global macro events that are likely to be subject to human interventions. It is the non-linear human interference that changes the natural order of things that the legends were able to capitalise on in the 1980s.

Another reason many are looking at global macro is that it could be an answer to the latest trickster: tail-risk hedging - a strategy that has the shape-shifting properties of the fox.

Warriors, who are there to serve the king - in this case the investor - are traditionally more flexible than many of their other archetypal counterparts. In recent years, however, kings have wanted warrior energy but without the bloodshed and so have been sending their warriors off to war without the weapons.

Just one look at Permal Macro Holdings proves Sun Tzu's point. In his book, The Art of War, Tzu emphasises the importance of positioning in military strategy; just like PMH with its 51% in discretionary warriors and 30% in systematic ones (less of the latter because of its one-in-four probability of winning).

Tzu always maintained that the decision to position an army must be based on both objective conditions in the physical environment and the subjective beliefs of other players in that environment: very similar to Permal's stance to add natural resources to the mix, intending to capitalise on the alchemy that would be created as commodities entered their super cycle.

Like all of the funds of funds that have lived through the battles of the past 20 years, Tzu thought strategy was not about working through an established list, but rather more about being able to apply quick and appropriate responses to changing conditions.

Planning works in a controlled environment, Tze acknowledged but he also believed that in a changing environment, competing plans collide, creating unexpected situations. It is something that the modern-day pirates - back from a hiatus since their golden age in the late 17th and early 18th centuries - have yet to learn as they attempt to find the hidden performance treasure.