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.
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Banker
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May 16, 2008 at 12:41 PM ×

Macro-Man

The market certainly have not been easy, but it seems to me that Risk is back in play. From my seat I see more people entering the water. What do you think?

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Macro Man
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May 16, 2008 at 1:05 PM ×

Yes, well it certainly seems the risk is that equity guys who are sidelined get sucked in. However, extrapolating the price action from lunchtime to the end of the day has been a dangerous game to play recently, as I've found to my cost...

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"Cassandra"
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May 16, 2008 at 1:52 PM ×

Lots large long positions Spiders and QQQQs in the spate of 13F fiilings over past few days.

And HUGE agreement on the concentrated Equity Beta portion: Mining, Oil, Fertilizer, Brazil. If and when this tide turns, there will be an insane a pile-up such as we've never seen before. But of course everyone knows that is impossible....or, if it happens, they will the one's to get out before eveyone else...

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Macro Man
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May 16, 2008 at 2:07 PM ×

Well, all I can say is that having the hedge on without the underlying position has been a distinctly unpleasant (and, alas, unprofitable) experience....

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Anonymous
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May 16, 2008 at 4:03 PM ×

MM, in these difficult times just a quick note to say keep up the good work., I am having a similarly Sisyphian experience!

DC

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Macro Man
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May 16, 2008 at 4:15 PM ×

Appreciate it, Anon. Another crap day today, unfortunately, including being long partially-hedged options and managing to lose money when the underlying goes down (this morning) and up (this afternoon.) That's REEAAALLLYYYY good for one's mental health...

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Anonymous
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May 16, 2008 at 4:40 PM ×

Reversion to the mean is a part of life, much like polyps, MacroMan. If you're in the game long enough, it happens.

I think we are seeing two economic stories playing out: hard landing vs. soft landing. As long as the soft landing persuades, financials boom. As long as the hard landing persuades, financials tank (and similarly for other sectors).

Yet neither scenario is likely to be correct. What's more probable is slow growth for 2008, followed by a hard landing for the US (with some associated collateral damage) for 2009. Why? Because after the election, the government spigot gets closed. The dental surgery opens.

My take on 2008 was that the metaphor of the Year of the Wood Rat was very appropriate. The second mouse gets the cheese.

MacroMan may be especially interested in the comment on the yen.

I'm eight points up on the S&P and four points absolute up for the year, and it feels wonderful.

I'm also well aware that that could evaporate like the morning mist, leaving nothing but cowpies as far as the eye can see.

--Charles of MercuryRising
www.phoenixwoman.wordpress.com

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Anonymous
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May 16, 2008 at 4:48 PM ×

(Sorry: I meant Earth Rat, not Wood Rat.)

--Charles of MercuryRising

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Macro Man
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May 16, 2008 at 5:18 PM ×

Charles, what's made this period so difficult has been a perfect storm of bad markets, bad luck, and bad trading. I normally have a high hit ratio- well above 50 pct. Since I started the new gig, it's been about 25 pct. I've heard similar from other traders....this is just a difficult period to trade macro- hence the need for introspection.

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Anonymous
admin
May 16, 2008 at 5:32 PM ×

i couldn't agree more mm--i got it 100% right today and after having given up 300 bps in april i made ----33 bps today and im in the black on every pos--unreal how hard it is to make money right now--atleast for me--on that front 2 stocks to short--vikram pandit just spammed me with some crap email about why citi is good (think that means sell citi unless they got paid by the ft for the advert of having it on his desk) also sell southwest airlines--the low cost aircarrier now regularly cost more to fly than united something stinks ---

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D
admin
May 16, 2008 at 5:44 PM ×

US equities turned short yesterday...it is fitting that your emotions encourage you to buy the equities market now. Consider a precious metals play to get some positive-inflation exposure against a bear spread (august window) on crude.

When in a funk it's better to do nothing or do the opposite of what your gut tells you.

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David Pearson
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May 16, 2008 at 5:58 PM ×

Macroman,

It seems that when everyone plays for "singles", the signal to noise ratio weakens. Multiply your sentiments by hundreds of funds, and you get the effect you have observed: directionless, choppy, with lots of pain to dole out. The pain is the price (to mix metaphors) of everyone keeping trades on a "short leash". Weak hands abound!

Now, add another ingredient to the weak hands: manipulation. Voldemort pulling back from Euro's on Hank's orders (and buying agencies?); the alphabet soup of support for credit spreads; Fannie buying conforming jumbo's; etc. Now check that signal-to-noise meter again. Weaker still...

So hear's a theme: this is a time for home-runs and long leashes. Suffer volatility or suffer (permanent) losses.

Something to think about.

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May 16, 2008 at 5:58 PM ×

Cass,

When you use the words "beta" and "inflation," you mean basically the same thing. Commodity beta - whether in equities, futures, bullion, whatever - is commodity price inflation. Perhaps this is obvious, but why not say it anyway?

Here is a prediction: commodities markets will correct when the flood of savings moving into them overshoots the fundamental cause of the "beta," which is of course monetary dilution. (More specifically, it is the hemorrhage of dollars which is leaking out of the US and into countries with very high marginal propensity to consume.) Ie, individual commodities markets will correct when they generate prices at which supply exceeds demand. I realize that this prediction is true by definition, so it is not much of a prediction. But why not say it anyway?

It should be noted, however, that this effect does not imply that all commodities markets will correct simultaneously, as you expect - with a generalized revulsion to "stuff." Of course the Street is very good at generalized revulsions, but it is also pretty good at tracking the fundamentals of markets. The fundamental revulsions will be different in each commodity, because the elasticity of supply is different, as is that of demand.

I don't think there is a way to predict this without specific market knowledge in each case. And note that markets in which there is no overshoot will experience a fundamental upward force - not all the money that floods out of an individual "stuff" bubble will flow back into financial assets. Some will flow into other "stuff."

You know this - it is the "narrowing" you have often described. But the point is worth stating anyway, methinks. Even if it's obvious.

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Macro Man
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May 16, 2008 at 6:25 PM ×

Anon @5.32, I empathize with your pain and salute your performance today. Alas, I sustained a sea of red today, only punctuated by a few islands of black.

D, I am not proposing to buy US equities here; I merely tried to identify what was missing from the methodology that I have employed in the past, and to quantify the impact of that. One thing I am not a fan of is doing a George Costanza and doing the opposite of what my gut tells me; the psychological downside is too great.

David, to me, a home run bet is one where you play for big moves with big positions. I cannot possibly justify that in this environment. Playing for bigger moves with smaller positions is part of my 'chip away' armoury; alas, the hit ratio tells you something about my accuracy. Still, the fact that I am flat despite whiffing on 75% of my strategies is encouraging; and one thing I would concur with is that short term trading is a mug's game, at least for this mug. Today's bete noir was a little punt from Wednesday which has cost me 30bps of performance.

One of the things that's made this environment so difficult is getting an adequate measure of risk. I've observed that my ex-post volatility is subtantially higher than my ex-ante risk measures would suggest...another reason why this has been such a f*** you market...

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Mr. Prop
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May 16, 2008 at 7:12 PM ×

It seems a strange juxtaposition of investor attitudes. First, there is the guy that was doing well playing for Armageddon, but just got murdered in short sterling and euribor. Second, there is the guy who was too long risk or bought into the reflation trade too soon. He is either out of business, or way down and for survival has bought a lot of tail risk to make sure that does not happen again. Third, there is the buy who has been long oil since Jan07, does not no what the fuss is about and wishes the rest of us would stop whinging. I dont like guy number 3 and am praying that the NYMEX triples marging requirements over the weekend. My sense is that the short-squeeze that has force many to part with thier cash and put some money to work in equities and other risky assets has just about run its course. However, like M-squared, I am not too keen on playing big. I also think that so much tail risk is owned that we will not get the wipe out high vol blowup. It sounds like it is going to continue to be a frustrating market.

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Anonymous
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May 16, 2008 at 7:37 PM ×

Trust in the mean, MacroMan.

You'll be outperforming before you know it.

Charles of MercuryRising
www.phoenixwoman.wordpress.com

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Anonymous
admin
May 16, 2008 at 7:38 PM ×

talking about Brevan, look at the correlation of their stock with Eurodollars.It's a nice picture

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Steve
admin
May 18, 2008 at 1:18 PM ×

Macro-Man,

I'm also a prop macro trader, for a French bank in New York. I have a very similar style and look at similar things and themes.

Alas I have had the same P&L experience. After a flat Feb and March and a modest gain in April, I finally hit some doubles and triples the first week of May. With headspinning speed it is all gone. I had a 30-tick profit in March 09 Euros, ended up cutting for a 10-tick loss. Cut some Gilts 10 ticks from the low (sold 106.60). Sitting on long bunds, short treasuries, had been an outstanding trade, now under water.

Only my short-term trading (taking 6 ticks out of TY longs and short, mostly) has kept me from turning a very solid month into a disaster.

Still, depressing as hell. After 4 months (I relocated here in Feb) I have maybe 50bp to show for it, and that has come with much sweat and tears. Ugh.

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Steve
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May 18, 2008 at 3:42 PM ×

BTW for those of you with a technical bent, you can clearly see a very well-formed head and shoulders pattern in Brevan Howard's stock, including a test up to the neckline!!

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Macro Man
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May 18, 2008 at 4:37 PM ×

Steve, I suspect that there are many of us riding the same unpleasant roller coaster at the moment. I wonder how much money has been lost in short sterling, for instance....I suppose I can look on the bright side and say that at least there's one train wreck that I've managed to avoid.

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Anonymous
admin
May 18, 2008 at 6:09 PM ×

I can count two blessings, Macro Man. First, I was long gilts rather than short sterling, so my losses were not quite all that bad. Second, I took the last week of March off, had I stayed I would have been solidly under water for the year.

Whew.

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Steve
admin
May 18, 2008 at 6:10 PM ×

Uhm that was me (Steve).

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