According to data included in the 2014 Preqin Global Hedge Fund Report, macro was the second most targeted strategy by investors moving into 2014; 29% of active searches included the strategy despite a relatively lacklustre 2013 in terms of performance. This search activity may suggest that investors were anticipating an economic climate where global macro funds would be well positioned; western monetary policy, particularly in the US and UK, has been in focus with potential interest rate rises and stimulus tapering.
According to Preqin’s Hedge Fund Analyst, macro funds had a disappointing performance in 2013 in terms of absolute returns, with average returns of 3.13% falling well short of the overall hedge fund average of 11.61%. The winning strategy categories in 2013 were event driven strategies and long/short, with these strategies returning an average of 15.56% and 14.56% respectively.
Although event driven strategies posted the highest returns of all hedge fund strategies in 2013, only 16% of investor searches were targeting the strategy moving into 2014. Expectations from some investors that interest rates could increase may have had an effect on the perception of the strategies. As leveraging capital becomes more expensive it can have knock-on effects on certain event driven strategies, such as those that rely on M&A deals. Conversely, if the Federal Reserve were to increase interest rates, it could help create volatility within the market that macro funds require to generate returns. Some investors may have been anticipating that these changes were due to happen sooner or later.
At this time however, interest rates remain low in the US and the UK. Previous references by the Federal Reserve and Bank of England that unemployment targets should be hit before considering an interest rate rise seem to have been brushed aside. In addition, a winning trade from 2013 in the form of rising Japanese stocks and a weakening Yen has reversed slightly in 2014, catching some funds out during a time of limited opportunities. Macro strategies lag behind the overall hedge fund benchmark in 2014 year-to-date, with returns of 1.75% compared to 2.44% (as of 31 May 2014).
Preqin’s Hedge Fund Investor Profiles currently tracks more than 2000 investors with a preference for investing in macro strategies. North America-based investors make up two thirds of these investors, with 23% based in Europe, 9% in Asia-Pacific and 2% in other regions. Of those investors investing in global macro strategies, 70% invest in funds with a core macro focus, while 45% allocate to managed futures/CTA strategies. Other common investment approaches in this category include commodities (targeted by 32% of global macro investors) and fixed income (26%), while a lesser proportion of investors target foreign exchange, natural resources, energy and environmental funds.
Preqin data shows that investors continue to have a preference for macro strategies despite the relatively poor performance of these funds in the recent past. Given the correct economic climate, investors appear willing to allocate fresh capital to the strategies; according to the Fund Searches and Mandates feature on Hedge Fund Investor Profiles, 33% of all active investor mandates include a search for at least one macro strategy.