Monday, April 02, 2007
March, and indeed the first quarter, are in the books, so it's time for a bit of reflection. 2007 hasn't been the easiest year so far, courtesy of roller-coaster rides in equities and FX carry. Yet point-to-point, there have been some reasonable opportunities: some equity indices are up quite nicely on the year, oil has pushed substantially higher, and expensive, high yielding currencies have become even more expensive.
Macro Man managed to hang on and eke out a small positive return (0.17%) for March, though the drawdown from the intramonth high was substantial. In contrast to prior months, it was the beta portfolio that did the heavy lifting, returning 0.64%. This is actually understated, moreover, as SPY went ex-div during March (taking $0.55 off the price), but payment will not accrue to the portfolio until the end of April.
The alpha portfolio was weighed down by costly equity hedges, the poor performance of commodity proxy plays, and the decoupling of 'risky FX' from equity markets. Equity, commodity, and FX alpha lost 0.59%, 0.14%, and 0.42%, respectively. On the other hand, just about every fixed income bet came off, and the fixed income alpha bets made 0.68%. Macro Man's one regret is that he didn't do more of the Euribor trade, as the view was strong and the risk/reward was solid.
Q1 was clearly a quarter for alpha, rather than beta. All told, Macro Man's beta strategies (ex SPY dividend) broke even on the quarter, so the entirety of the 2% quarterly return was from alpha bets. Fixed income and equities have seen far and away the best alpha returns, with slightly negative performance from commodity and FX bets. If Macro Man's portfolio is anything to judge by, "beta hugging" macro managers will have delivered flat to slightly negative returns for Q1 (assuming 0.50% quarterly management fees.)
It was disappointing but not surprising to see commodity alpha as a singificant drag on portfolio performance. After all, the exisiting positions are both proxy (Goldcorp) or RV (Dec WTI-Brent spread) positions rather delta bets on the underlying. Given that Macro Man recently explored the dangers of proxy trading, some remedial action may be required soon.
In that post, Macro Man offered a legitimate, tangible prize to anyone who could correctly identify the two correlated series in the chart below. The point, of course, was to demonstrate that apparent correlation does not imply causality. Sadly, there were no takers, though it's difficult to know whether that's down to the difficulty of the task or the paucity of interest that Macro Man's new quiz feature is generating.In any event, the two series are about as different as two things can be. Series two is the June 2007 short sterling contract, through which investors can bet on UK cash rates. Series one is an index displaying the long-term average temperature per day in Fukuoka, Japan. The correlation appears strong, but the underlying relationship is actually zero. So the next time somebody shows you a chart that appears to demonstrate a relationship between two series, remember to ask yourself what's the temperature in Fukuoka.