A short introspection after a difficult week

Macro Man has had a difficult, difficult week, so today's post is meant to be something of a catharsis and a somewhat jumbled attempt at self-analysis.

When Macro Man left his previous employer in late January, the market was a rich one for macro; there was a high level of volatility, central banks were panicky, and the market price action was highly directional and driven by classic "macro themes." When Macro Man walked out of his office for the last time, his highest-conviction idea was probably short USD/JPY.

And in February and March, while he was spending time on the ski slopes (as well as the less salubrious environs of Croydon), that was a great trade to have. It was 108 when he walked out the door, and on the 17th of March, the Monday after Bear Stearns blew up, traded below 96. Macro Man walked in the door of his new shop two days later.

Since then, it's been a bloody difficult market. Really, it's been like standing on the beach amidst a herd of pink flamingos, watching them get clubbed to death by an invisible predator. Take, for example, Brevan Howard, one of the most successful macro funds out there. Since Macro Man started in hew new shop, Brevan (as proxied by the BH Macro feeder fund listed on AIM) has shed 11%. Ouch!


Now, in fairness, Brevan is still up on the year, thanks to hitting the ball out of the park when the macro going was good. And hey, let's not forget that these guys have been incredibly successful (and gotten very rich) over the past few years.

But their recent struggles are emblematic of a change in conditions. There are some markets where you are rewarded for being right and easily let out for being wrong. Such was the case for the few months ending in mid-March. Then, there are other markets where it's bloody difficult to make money even when you get the economics right and you get crucified for being wrong. Such, it would appear, has been the case since Macro Man started work at his new shop, alas.

Now, Macro Man's modus operandi is typically to take aggressive risks when the going is good, making good returns of several percent per month....and to chip away, trying to make half a percent or so when things are difficult.

And so he has done since starting work; between his first day and last Thursday, he'd managed to chip away employing limited risk and generated profits of P/L of roughly 0.75%. Not the path to eternal riches, to be sure, but bang in line with the plan. Over the last week, he's given it all back. Short cap equities have rallied hard. Bunds have been crushed. The eurodollar curve has flattened. And all his little bets seem to enjoy 6 hours of joy and then race away from him with alarming speed.

Now, broadly speaking, Macro Man has been running money in much the same way as he did in the old blog portfolio: relatively simple beta strategies overlaid with alpha strategies (of both the hedging and money-making variety.) The one thing that he hasn't had is an equity beta model, because he's still doing the research.

And maybe that's one of the reasons he's scuffled over the last week. His alpha strategies, which were a wonderful offset to the long beta positioning of "cheap" equities that he had in the old blog portfolio, have given him more directional risk in the absence of a static long equity position. The SPX was roughly 1350 when Macro Man started; it closed yesterday more than 5% higher. Had he had his 60% of AUM allocation to an equity beta portfolio, like he had in the old blog portfolio, that would have added another 3% to his returns....and he would be much, much happier.

So perhaps he should intensify his research and get that equity beta portfolio up and running. It's actually comforting to know that had he been running money a la the old blog portfolio, he'd be doing better than he has done (and presumably be less frustrated.) Ahhh....the catharsis is working already.