Macro Hedge Funds Throw In The Towel, Boost Their Equity Exposure To Highest In Three Years

Tyler Durden's picture

There was a time when macro hedge funds were just that: macro. In other words, their beta was as close to zero as possible, meaning that they don't track the broader equity market's returns but instead try to generate profits betting on  macroeconomic trends in global markets while investing in all asset classes. In fact the lower a macro fund's beta the better.

Then 2014 happened and everyone got slaughtered betting that the economy would improve, global GDP would take off and bonds would sell off. We explained this at the end of May in "The Two Mega-Pain Trades: JPM Explains Why The "Big Money" Is Losing Big Money In 2014." A week ago the WSJ also picked up on this story:

Hedge-fund managers including Paul Tudor Jones, Louis Bacon and Alan Howard are among those who have misread broad economic and financial trends. Some have lost money as Japanese stocks fell, while others have been upended by the surprising resilience of U.S. bonds.


An unusual period of calm has exacerbated problems for many trading strategies dependent on volatile markets. The losses by these so-called macro investors are contributing to a trading slowdown hurting the largest investment banks.




"Macro investors have had a very, very hard time with the fact that bonds have done well and volatility is so limited," said Matt Litwin, director of research at Greycourt & Co., a Pittsburgh-based investment firm that invests $9 billion in hedge funds and other firms but has been reducing some of its investments with macro hedge funds. "There are a lot of losers."


Many funds piled into Japanese shares last year when they began rallying. But the Nikkei Stock Average is down 7.1% since reaching a high in January, amid doubts about the sustainability of Japan's economic recovery. Fortress, a $63 billion firm, has acknowledged to investors in its Fortress Macro fund that it was hurt by both this year's run-up in U.S. Treasury prices and weakness in the Nikkei. The Fortress Macro fund was down more than 3% this year as of June 6.

And with the 2014 calendar nearly half way done, and the macro hedge fund community not only underperforming the S&P 500 for the 6th year in a row, but generating a negative return YTD, what is a macro hedge fund universe to do? Why lose all pretense of being sophisticated fundamental trend pickers and do what Bernanke and Yellen have been forcing everyone to do from day one: go all in stocks of course! According to JPM as of this moment there is no difference in the positioning of both traditional long/short hedge funds and macro funds, both of which have increased their equity exposure to the highest since May 2011!

From JPM:

Our hedge fund beta monitor (Chart A17 in the Appendix) shows a proxy for Macro and Equity long/short hedge fund equity exposure. This proxy is constructed by the rolling 21-day beta of macro hedge fund returns with respect to returns on the S&P500 index. Macro hedge funds are a $500bn plus universe and account for around 19% of total hedge fund assets. This beta shows that both macro hedge funds and equity long/short hedge funds have increased their equity exposure recently to the highest since May 2011.


What does this mean? Well, unless corporate buybacks are about to have their greatest quarter in history, virtually all the "macro hedge fund" money on the sidelines, to use the most idiotic phrase in existence, was just allocated to stocks in the past three weeks. Which also means that there is nobody left to buy. However, with the global geopolitical situation getting worse by the day, there may suddenly be quite a few willing to sell.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
km4's picture

The coming 'tsunami of debt' and financial crisis building in America via @guardian

Debt held by American households is rising ominously. And unless our economic policies change, that debt balloon, powered by radical income inequality, is going to become the next bust.

Our macro models at the Levy Economics Institute are showing that the US economy is about to face a repeat of pre-crisis-style, debt-led growth, based on increased borrowing. Falling government deficits are being replaced by rising debts on everyone else's ledgers – well, almost everyone else's.

What's emerging is a new sort of speculative bubble, this time based on consumer and corporate credit.

Right now, America is wrestling a three-headed monster of weak foreign demand, tight government budgets and high income inequality, with every sign that these conditions will continue. With that trio in place, the anticipated growth isn't going to be propelled by an export bonanza, or by a government investment boom.

knukles's picture

So, does this confirm or deny that Dennis Rodman is either gay or just plain fucking nuts?
People, I'm just trying to keep our focus on the important stuff.

flacon's picture

I thought Zero Hedge said it was the Japanese who were buying the past three weeks.... maybe both are buying. 

SoberOne's picture

Personally,  I'm going long on miners...

I am Jobe's picture

Not sure why Amerikan Sheeples will bother with this. They have their IPHONES, Food , EBT, Darshians and don't forget NFL, MLB, NBA and Satellite TV with 150 channels. Must keep this going no matter what the cost is.

nodhannum's picture

 @km4, "Debt held by American households is rising ominously"...not in this household  @km4...we are a coupon couple with a large scooter that gets 70mpg and a budget that is "tighter than a bears ass in persimmon season".  Soon to be no debt at all anywhere with a good strategic reserve AND a 40 acre farm that will grow anything.  Starve the f__kers.

SoberOne's picture

Max em and buy gold, c-b4nks love that sh1t.

MedicalQuack's picture

Well look at this hedge fund, they are getting desperate for models.  They hired the former Computer Scientist from IBM Watson to model, praying for a cognitive data model that will do it for long Jeopardy and Healthcare for this computer scientist.  WellPoint by the way is an IBM reseller, did you know that?  Just thought I would toss in that tidbit too:)

This is a good video clip from the Quants of Wall Street documentary...boy he's good:)  What do the quants and data scientists do when they can't find a relationship with millions or billions of bits of data connected to us humans..they make one up. Libor anyone?

We have financial models and healthcare models too with financial implications just failing like crazy as the game of code hosing is starting to come an end at some point. 

Freddie's picture

....getting desperate for models.

They must be desperate to hire anyone from IBM or formerly from IBM. 

Their consultants are just so good.  (sarc)

The Econ Ideal's picture

Watson is a loss for IBM and they are hyping it up to get back the sunk costs. Watson cannot "think," it is a rules-based "expert" system that works off of brute force optimization routines to deliver responses to canned questions. As for hedge funds and quants, the record hasn't been so stellar so they eventually resort to simpler strategies to force market movements. Targeting retirement money (aka "dumb money") is just an ongoing scam. The worst offender imho are brokers that sell their client order flow, and front run their own clients. Lots of them out there.......The next market crash/decline will be quite entertaining, a data collection exercise for D. Sornette, et al.

Yen Cross's picture

 lol "But it's different this time".

Greenskeeper_Carl's picture

I hope not. I had been cash on the sidelines in my IRA, already pulled my contributions out, left my gambling winning in there cuz I do t wanna pay the taxes. On Friday I put about 15% of it in a S&P 2x bear. Just for shits and giggles. Not willing to bet on the oil price just yet. I think all this conflict is probably largely priced in.

huggy_in_london's picture

The macro hedge fund model is broken.  Macro funds these days dont take macro risk.  They set their traders silly targets with near zero drawdown tolerence.  I am sorry to break it to the guys running these places but there really are not many 5 Sharpe traders.  And those that exist generally arent going to appear all of a sudden and be happy to go work for a shop that won't tolerate a 3% drawdown.  They'll be trading for themselves!

Frankly, in 2014, these places give investors the impression that they are diversified risk takers but in reality all that they are doing is trying to maintain their AUM so that the big guy up top can continue to collect his 2% fee.  The idea of it returning a decent yield to investors is really ancillary.  They have structured their risk taking to effectively ensure that individual punters can almost make no meaningful return.  This may of course change if the market changes, but right now ,this is the state of play.

max2205's picture

Why worry when the govt has your back.....

valley chick's picture

Till they don't.  But isn't that the plan all along?

Relentless101's picture

Window dressing. "Look at all the good names we are in. It would be a shame to pull money now."

syntaxterror's picture

I'm sure the banksters (and government) are preparing a secret bailout as I type.

I Write Code's picture

Hmm, this may be an optimistic view of the funds, if they are bailing from bonds just as bonds blip back down again and putting the money into stocks that could be a sign that bonds are going to go further down, that is interest rates back up now.  Yellen may have sent them a tweet.  The indecision pattern on the ol' McClellan summation index wants to break one way or another, and the bias is definitely upwards.




zipit's picture

Capitulation, bitchez

I am Jobe's picture

Across the nation I am sure folks are planning on vacation and this  will do well. More debt is the solution to maintaining the family. 

yogibear's picture

Time to max out that 125% home LTV and buy physical PMs. Then default.

More people do this the more the banksters have to eat non-performing loans.

starman's picture

Full retard! Peak insanity! 

AccreditedEYE's picture

Don't think about shorting. Don't care how many pretty charts they put up... You will get shanked!