Thursday, June 7, 2018

Are Macro Gods Staging a Comeback?

Miles Johnston of the Financial Times reports, Alan Howard hedge fund gains 37% in May on market volatility:
A new $2.3bn macro hedge fund run by billionaire British investor Alan Howard gained 36.7 per cent in May as it took advantage of volatility in emerging markets and European government debt.

The large gain takes the Brevan Howard AH fund’s return so far this year to 44.3 per cent, a person familiar with the matter said, and marks a comeback for the trader since he launched the standalone fund last year, managed by himself rather than by a team.

The gain, first reported by Bloomberg News, also breaks many years of poor performance for Mr Howard and other macro traders who have struggled to make money at a time when central bank intervention has doused once successful trading strategies.

Mr Howard had previously seen the largest vehicles of the Brevan Howard hedge fund he co-founded haemorrhage assets, shrinking from being one of the largest hedge funds in the world in 2013 to managing less than $10bn in total.

By email, Mr Howard said: “I’m happy that the loyalty and confidence shown by my investors has been rewarded with a very positive result”.

A person familiar with the fund said that it was planning to open it up to new allocations from existing Brevan Howard investors who had not entered Mr Howard’s AH fund.

The fund charges investors a 30 per cent performance fee on profits, as well as a fixed 0.75 per cent management fee, meaning Mr Howard is on track to reap a large payday following its gains for the year so far.

The BH Macro fund, a separate listed vehicle tied to a master fund run by multiple traders at Brevan, has performed less strongly, recording a 9.1 per cent gain in its net asset value in the year so far.

In 2015 Brevan Howard found itself entangled in a non-compete dispute with its former star trader Chris Rokos — who generated $4 billion in profits for the firm from 2004 to 2012.

Mr Rokos, whose surname makes up the “R” in Brevan’s name — which was later settled. Mr Rokos went on to launch his own hedge fund which has since overtaken his former employer in assets.

By 2016 a number of Brevan Howard’s blue-chip public pension fund clients began to pull their money from the firm, with the New York City Employee Retirement System and New Jersey’s State Investment Council among those who redeemed investments.
The Bloomberg article provides a few more details:
Howard’s own fund manages about $2.3 billion including his money, that of outside investors and Brevan Howard’s main fund. The AH Master Fund is open to small amounts of new money from existing Brevan Howard investors, at a management fee of 0.75 percent and a performance fee of 30 percent, another person said. A spokesman for the firm declined to comment on performance and assets.

After years of lackluster performance, Brevan Howard’s main fund is also making money. The $4.2 billion Master Fund, which is managed by a team of traders, gained 7.6 percent in May, its best monthly return since the 2008 financial crisis. The return this year is now 8.9 percent. Other macro traders who profited in May include Jeffrey Talpins, whose hedge fund, Element Capital Management, gained 4 percent in May and 17.5 percent this year.

Middling performance over the years had prompted investors to pull money from some of the oldest and most established macro traders including Paul Tudor Jones and Andrew Law. Brevan Howard’s assets have slumped about 75 percent from their 2013 peak to about $8 billion now. The decline had last year fueled speculation that Howard may be the latest hedge fund manager to throw in the towel on his business and turn into a family office -- something the firm ruled out in December.

Brevan Howard has cut fees, employees and returned to a previous business model of running several funds in a bid to reduce reliance on one main money pool.

Macro funds showed signs of staging a comeback earlier this year after posting gains. And investors have poured almost $12 billion into such funds during the first four months of the year, the most of any strategy, according to data compiled by eVestment.
All of a sudden, investors are pouring billions into CTAs and macro funds, believing the nonsense that QE is finished  and a new era of QT and "rate normalization" is upon us.

It was almost one year ago where I openly questioned whether macro gods are in big trouble, stating the following:
[...] size is not your friend in this market, which is why you see guys like George Soros and Alan Howard seeding their top talent. They know it's better to seed talent and let them try to earn money on their own, hopefully reaping big gains by owning a piece of the management company.
I also stated this
Fret not my dear macro gods, there is good news ahead. As I explained on Friday when I dismissed Ray Dalio's notion that we are witnessing the end of central banks' era, the Fed is making a mistake, raising rates at a time when the US economy is clearly slowing.

I believe the Fed wants to raise rates to have ammunition to cut rates when the next crisis hits us in the not too distant future but as central banks turn hawkish, I worry that they will only exacerbate global deflation.

Smart global macros know exactly what I'm talking about and let me repeat my macro positions:
[..] here are my global currency positions:

  1. Long the US dollar. Buy this weakness. The weakness in the US dollar is only temporary. As the US economy slows and everyone is talking about how great Europe is doing, pounce on the opportunity to load up on the greenback. Europe and Japan will also enter a significant slowdown over the near term and their currencies will bear the brunt of this slowdown.
  2. Short the CAD, Aussie, Kiwi and commodity-related currencies, including many emerging market currencies. 
I see global economic weakness ahead which is why I'm short oil and other commodities. People are delusional, the US economy isn't as strong as they think. Jim Chanos gets it but to my surprise, so many  others are completely out to lunch.
Now, looking back, I was WRONG and too early in those macro calls which goes to show you, even if you have macro conviction on something, you can get creamed in these markets, literally creamed.

I remain defensive in my overall macro outlook, think escalating trade tensions, if they persist, can turn a soft patch into a rough patch, but the market keeps inching higher and higher, defying all logic.

Had a conversation with an astute blog reader of mine earlier today who told me: "These markets don't make any sense, they're run by algos squeezing shorts out of their positions but the global economy is rolling over." I told him: "The market is there to exact maximum frustration on market participants like you who think logically."

He agreed and told me: "That's why I stick to my 60/40 portfolio but I have to tell you, I'm increasingly scared as everyone is long credit and private lending strategies this late in the cycle."

In short, he's right to fret, the investment herd is stupid and typically finds refuge in crowded trades like long high yield debt or FAANG stocks. Then you have multibillion CTA funds who are nothing more than trend followers exacerbating these trends, and you have the makings of the next crisis.

The hard part is figuring out when the music stops, especially when you know central banks stand ready to backstop these markets at the first sign of serious trouble.

Now, getting back to Mr. Howard, so he made a killing in May taking "advantage of volatility in emerging markets and European government debt." Add some leverage on that and voila, 37% in one month!

As someone who monitors and sometime trades biotech shares, I know what it feels like to see a swing of 30, 40, or 100% + in a week or even a day but when you see a big macro fund popping such figures, your antennas should go up.

If Mr. Howard was still in my hedge fund portfolio (he wouldn't, I would have redeemed a long time ago), I'd sit down with him and say this: "Alan, great returns in May, outstanding, but please explain to me the risks you took to pop such outsized returns."

Anyone can be lucky and pop big returns on a macro call (piling on the leverage) or biotech stock that goes their way but what if it didn't go their way? What if Alan Howard got creamed and lost 37% in May?

He'd be finished and his "loyal" clients would abandon ship. Many already have.

Now, I'm not here to criticize Alan Howard. The man has earned his place in the pantheon of global macro gods but these are brutal, BRUTAL, markets and it's possible that he and others like Paul Tudor Jones are finding it hard to adjust.

The smartest thing Alan Howard did was make up with his former star trader Chris Rokos and help seed his macro fund.

According to Bloomberg, Rokos, who co-founded Brevan Howard and made $4 billion for the firm from 2004 to 2012, oversaw $8.2 billion at the end of March, overtaking his former boss in terms of assets under management.

Rokos, described by Howard as an “exceptional trader,” raised his initial capital from investors including Blackstone Group LP and has occasionally opened the fund to new money since then.

Rokos’s fund returned 10.5 percent in the first two months of the year so maybe Howard piggybanked off his former star trader to shore up his own fund.

I just read that Rokos's head of compliance Nik Holttum has left the firm after 18 months which is something worth following up on but there is no doubt Rokos is a rising star in the competitive macro world.

There are others like Jeffrey Talpins of Element Capital who continues doing very well (read this older comment of mine) and other stars like Greg Coffey, the ex-Moore Capital trader who recently got the double the seed commitment from his former boss after posting great initital returns:
Hedge fund founder Louis Bacon will double his investment in the new fund set up by former colleague Greg Coffey after it showed a return of 4.6 per cent in the seven weeks since it began trading, according to people familiar with the investment.

The performance of the macro fund, which focuses on emerging markets, compares with a weaker broader sector performance this year. Macro funds were down 0.5 per cent to the end of April, according to data from eVestment, while hedge funds across all strategies were up 0.2 per cent over that period.

Mr Coffey, 47, has returned to the hedge fund industry after more than five years away after he retired as co-chief investment officer of Moore Capital alongside Mr Bacon, the billionaire founder.

Mr Coffey has received commitments of $2bn for the fund, Kirkoswald Capital, but has not received all of it yet. Mr Bacon, who uses his own capital to invest in hedge fund start-ups, had already committed to supporting the launch but doubled the amount after seeing the initial returns, the people said. They would not comment on the amount involved.

Mr Coffey gained attention in the London hedge fund industry when he joined the GLG Emerging Markets desk, where he raked in double-digit returns. In 2008, the year of the financial crisis, the fund’s returns started to sour and it suffered heavy investor redemptions.

After he left to join Mr Bacon at Moore Capital, he was unable to replicate his previous levels of performance. The fund returned 20 per cent in 2009 and 5 per cent in 2010, but became lossmaking in 2011. He decided to take an early retirement near the end of 2012.

Mr Coffey, who grew up in Sydney, Australia, spent the last five or so years with his family in London, Australia, and on the Scottish island of Jura, where he owns the 12,000-acre Ardfin estate and has built a golf course.

Despite being out of the industry for more than half a decade, the allure of a possible return to form was enough to attract backers such as Mr Bacon to Mr Coffey’s launch, which is billed as being the largest in Europe this year based on its fundraising target of $2bn.

After a fallow period, hedge fund start-ups with star traders at the helm appear to be having a successful year of fundraising. Michael Gelband, the fixed-income trader once seen as heir apparent to Izzy Englander at Millennium Management, targeted an $8bn raising for his own fund, ExodusPoint.

Daniel Sundheim, the former chief investment officer at Viking Capital, was looking to raise $4bn for his DI Capital, while Steve Cohen raised more than $3bn after opening his family office to outside investors this year following the expiry of a regulatory settlement that barred him from managing money from others.
I've already told you it's time to take a closer look at hedge funds like Steve Cohen's new fund and even some of these younger funds but you still need to understand the risks they're taking to deliver their leveraged beta alpha.

Like I told that astute investor earlier today, "everyone is long credit and private lending strategies and this terrifies me."

At least macro funds provide you liquidity and some downside protection (they should when it hits the fan).

So, it shouldn't surprise you that investors are flocking to 'macro' hedge funds, but not only the old guard except for Bridgewater which is now bearish on all financial assets (see below).

Just be careful. I used to invest in top macro hedge funds, CTAs and L/S Equity. I went head to head with the Ray Dalios of this world, it was my job to ask a lot of questions and even irritate them at times (just ask Ray) and I can tell you from experience, even if you find great managers, macro isn't an easy strategy and sometimes even top experienced traders can get hurt if they get their macro calls wrong (like Ravi and Jesus at Vega Asset Management).

Anyway, what do I know, Ray Dalio once looked me in the eye and blurted: "What's your track record?". I was a lot cockier back then but years of trading these crazy markets for my own personal account have humbled me.

I still take huge risks when I have high conviction and so far so good, but as I told that astute investor earlier today: "I feel like going all in back in US long bonds (TLT) and sleeping well at night but part of me sees great returns in some of the stocks I'm trading now and wonder whether there is a lot more upside."

He replied: "You can sleep well at night knowing all your money is in TLT which swings quite a bit for bonds but I guess relative to biotech, that's nothing for you."

I said: "It does swing and can go down 5% or even 10% but if there's a crisis that pops up anywhere, I will make back those losses and make a lot more."

I tell you, those macro gods have it easy, charging 30% performance fees on top of a 1% management fee on billions, some of us have to bust our ass to make a pittance trading relative to these superstars.

Below, Bloomberg reports on Alan Howard's comeback. Take these media reports with a grain of salt, he had a fantastic month of May and was lucky his macro calls came through. It remains to be seen if he can continue delivering exceptional returns (unless he piggybacks off Rokos).

And CNBC reports the world's largest hedge fund has made the astonishing claim that it's bearish on almost all financial asset classes, according to the website Zero Hedge. Folks, as a past contributor on Zero Hedge, take everything you read on that site with a shaker of salt.

Lastly, Kingston University Professor Steve Keen discusses the approaches of France, Germany, and the United States heading to the G-7 summit and the prospect of a global trade war. He speaks on "Bloomberg Surveillance."

This is a brilliant discussion, a rarety in financial media, take the time to listen to Steve Keen, he's spot on.



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