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!
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.