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Macro Strategies Hedge Funds Provide Capital Protection in Volatile Financial Markets

by Robert Cullinan

  • 04 Feb 2016
  • HF

Macro strategies hedge funds seek to generate returns by investing in financial instruments for which prices fluctuate based on global economic policy. Of the seven top-level strategies on Preqin’s Hedge Fund Analyst module on Hedge Fund Online, macro strategies represent 17% of all funds, behind only funds utilizing equity strategies. Currencies, commodities and debt strategies are widely employed by funds that adopt global macro as a top-level strategy. At a time when central banks’ policy decisions are demanding the attention of financial markets, investors have been attracted to their ability to generate positive returns even in unstable equity market conditions. In 2008, when the S&P 500 declined 37%, macro strategies funds were still able to achieve positive returns of 3.25%. In the same year, equity, credit, event driven and relative value strategies returned -23.09%, -13.76%, -24.58% and -5.54% respectively.

The chart above shows the three-year rolling volatility of macro strategies hedge funds against the S&P 500. Macro funds have had consistently low volatility over the past three years, while volatility in the S&P 500 has fluctuated more erratically. Additionally, the chart displays the low correlation between macro funds and the S&P 500, indicative of macro funds’ ability to provide capital protection during periods in which the S&P 500 delivered negative returns. 

While macro funds may not be built to achieve exceptional returns in bullish markets, historically they are able to offer stability in market conditions where other strategies may be vulnerable to underperformance. A composite of all hedge funds has displayed three- and five-year volatility of 3.82% and 4.78% respectively, higher than the three- and five-year volatility of macro strategies funds (2.50% and 2.83% respectively). Global volatility in financial markets has shown no signs of subsiding in the near future, with the December 2015 interest rate rise in the US elevating equity market volatility on a global scale, which may lead to more capital flowing to macro strategies in the near future.

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