Flamboyant management is back

by Cedric Dingens

Flamboyant management is back

The new decade marks the big comeback of the global macro managers who put their stamp on the ‘70s and ‘80s.

With inflation, commodities, high interest rates and volatility returning to the forefront, we could indeed be headed back to the glory days of flamboyant managers like Michael Steinhardt, George Soros, Julian Robertson, Paul Tudor Jones and Louis Moore Bacon. So, is Wall Street about to hark back to Gordon Gekko’s suspenders, pinstriped shirts and slicked-back hair? While it’s still too soon to predict what traders will be wearing next season, one thing is already clear: market conditions are in place for a major comeback by global macro management, the hedge-fund style that clinched the reputation of active management in the ‘70s and ‘80s.

Two major advantages

As the conflict in Ukraine sadly shows no signs of letting up, we are now at peak geopolitical uncertainty. At the same time, the western economies are at a major turning point, with inflation long forgotten, monetary policy being normalised by the central banks, globalisation facing tremendous challenges, and western governments resolved to improve their energy independence. As a result, the rules that have been in place for more than ten years are now under massive scrutiny. In fact, although equities were the favourite asset class for over a decade, and steadily climbing markets seemed to say that index-based ETF management was the ultimate weapon, that’s all in the past. Now, global macro strategies have two key advantages: they can handle all the asset classes and make a profit when volatility sweeps through the market again. That’s because, to generate the stellar performance that made their name, these managers need big, fast, surprise moves.

When “greed is good”

Their strength lies in their capacity for endlessly questioning and reinventing themselves. They’re not convinced there’s one ‘best’ way to earn money for their investors, and they won’t hesitate to switch styles and tactics to adjust to new conditions. Purely going on their gut, these traders can make directional bets on tough markets like commodities and energy – which are super-complex for most market players, given the many technical aspects and the flows that must be factored in. This means they can bring real added value, unlike other managers who are still locked into their convictions. Take, for example, the legendary Paul Tudor Jones, who, more than 40 years after creating his Tudor Fund, can still switch gears to respond to a new environment, by returning to Trend Following strategies, which he had long abandoned, and which may have just had their best quarterly performance in their history. Chalk it up to intuition or talent, the outcome is the same, and it’s backed up by the results of the DJ CS HF Global Macro Index, which is up +16.2% year-to-date (at end-March) versus a (still respectable) +2.1% for the overall DJ CS HF Index.

Duration is here again

Interest rates have been on a downward trend for almost 40 years. This means that today’s bond managers have spent their careers in a friendly environment, with no sustained increase in yields. In fact, for decades, all they’ve had to do to secure steady capital gains is purchase long-term loans. Yet this fattening season now seems to be ending, and with rates shooting up, bond funds and pension funds are suffering heavy damage. The Swiss government’s 4% bond maturing in 2049 has lost more than 28% since the middle of 2019. Some bond managers have had to quickly dust off their textbooks and delve back into the concepts of duration and sensitivity. Meanwhile, squeezed by their Asset Liability Management demands, pension funds are starting to notice, and replacing their usual fixed-income investments with Relative Value strategies. These strategies continue to deliver positive performance month after month, oblivious to market volatility and rising interest rates.

The new crop of stars

This supportive environment lets new managers make a name for themselves. Some of these new emerging talents are David Rogers, a fund manager for Castle Hook who’s also a bit of a spiritual son to the legendary Stan Druckenmiller. His fund is up by more than +38% this year after garnering gains of +27% in 2021 and +49% in 2020. Among the other new macro managers, all fairly low-profile, we have Al Breach, a fund manager at Gemsstock, up +13.7% year-to-date (+10% in 2021 and +50% in 2020). And Andrew Law at Caxton has done even better, with +24% this year (+8% in 2021 and +63% in 2020).

A pilot at the controls

As we can see, the next generation has arrived, and active management has plenty of reasons to win back investors. And that may be the key: in these periods of instability and extreme uncertainty, it’s reassuring to have a real pilot at the controls who can actively manage risk levels and react quickly to surprises.

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