I was going to post this as a comment in the prior post...but I got rolling into full "post" length.
The Macro world lost one of its godfathers this week. Hugh Hendry has thrown in the towel and closed his fund. If you've been in this business long enough, you have been through what Hugh Hendry is dealing with. You can hear it in his voice in this interview--there are elements of regret....and relief. You can't keep a guy like him down--he'll be back, stronger than ever.
But how did this happen? Hendry claims, or at the very least implies, the global macro model is “broken” due to higher costs, low carry and fewer opportunities. What does this mean for the asset class? He's absolutely right from a business perspective. So much has conspired against global macro. Not only has the regulatory environment changed to make running the fund more difficult and expensive, but fund raising has become more difficult, time consuming and onerous, and leverage is *dramatically* harder to come by and more expensive than it was 5, 10 or 20 years ago. From an economic perspective, there is simply less alpha to go around when central banks are putting their thumb on the scales. Combine that all with flat curves and zero carry and it is amazing some funds are able to slog on as long as they have--I remember when the 4-5% carry from unencumbered equity was a nice pot of cash at the end of the year. No longer.
When I talk to pension fund and endowment managers today about how they invest their money, they want a more persuasive value proposition than "I'm smarter than the average bear." They see the market as divided up into pots of risk premia for them to exploit with their long-term time horizons. That is why they have this blood lust for private equity--historical performance argues there is a premium there that will generate superior long term returns. While that is debatable--look at my thoughts on the subject here, and here--that is the conventional wisdom being sold by armies of investment consultants, and as I highlight above, these investors need returns beyond the “LIBOR-plus” benchmark for global macro.
To make matters worse, as Hendry highlights, low rates and central bank intervention have radically changed the correlation of the asset class. If you are simply bullish, how are you going to generate alpha to justify your fees? If you are bearish, you are rolling a very large rock up a very large hill. If you are trying to find the uncovered opportunities that will differentiate your returns...well...you better hope it is far enough off the beaten path to not fall victim to the next bout of liquidity injections from the central bank of your choice, or the unwind of the previous avalanche. Without low correlation, there's simply no value.
Combine all that with money money money...Competition is fierce. Fees are still high. And the fuses are short. Tough to see how the genie will go back into the bottle for the asset class.
Shawn
TeamMacroMan2@gmail.com
@EMInflationista
Shawn
TeamMacroMan2@gmail.com
@EMInflationista
11 comments
Click here for commentsI love Hugh. He's imaginative and inspires fresh thinking. He's also delightfully human, and I love that about him too. I wish him the best and hope we hear from him in the future.
ReplyRe the macro fund model, it's a provocative critique. It's hard to think of a better risk-adjusted trade than the levered carry trade in US fixed income the past three decades. To the extent many macro funds were running this trade, it's easy to see how some attained "rock star" status. With curves flat and rates so low, I agree with Hendry that it just doesn't look a good trade going forward unless you have very strong conviction that US rates are converging to Japan's (like Hunt or Gurevich). Hugh talks about changing his mind in November 2013 and learning to love equities, but the macro fund model makes that very hard. As a modern-day macro manager, the one thing you can't be forgiven is a large draw-down coinciding with an equity market draw-down. "Buy calls," you say? Look at the data. Buying equity calls systematically has been a dreadful strategy -- all the return comes from getting paid to take downside risk, i.e. selling puts. And selling puts is the one thing a macro manager can't do. So, I have sympathy with Hugh's plight on this point.
I have not followed Hugh that closely, but from time to time I have read his views. All of what you posted notwithstanding didn't Hugh just make a lot of bad calls over the last 10 years? Appears that way to me and I will openly say I agreed with some of his views and equally found myself offside as well.
ReplyDon't hate me - but there has been some easy money in markets lately.
ReplyThe amount of cognitive dissonance in the industry..
I was speaking to a hedge fund manager last night running >3 billion. He had buffet quotes on the walls, but was talking about buying a company on cash flow multiple of 15 with structurally declining earnings .
Meanwhile companies like Apple have been dirt cheap. You can buy a firm like Fiat with brands like Jeep and Maserati on a 3x after tax multiple. UK land banks were on sale for sub 5x - that's a 20% base return, backed by the most attractive real estate on the planet.
On the macro side there have been huge tradable trends in things like the Aussie dollar, crude, and EM.
I can also say from personal experience it's possible to do well on the long vol side. There have been multiple cashable spikes in the VIX, for example. More than one a year on average, since 2009. You had to be able to find opportunities on the long side, though.
Anybody who didn't read the docs and understand the cash management of something like VXX lost their shirts. Anybody who wrote off ALL vol ETFs missed that attractiveness of something like SVXY for adding a risk-controlled but aggressive long tilt to a portfolio after >50% sell-offs.
Allocators have forced hedge funds into buckets. But the best positioning has been across buckets, long equities + long vol + discretionary macro, for example.
It sometimes seems that people get airtime and raise money by sounding smart, and they sound smart by being cynical.
That cynicism led those like Hugh to miss the greatest opportunity set the world has ever seen.
According to that chart in the FT, Hendry has only cracked 20% twice in 15 years. That suggests a lack of skill rather than bad luck.
Having said that, wish him well for his next endeavour.
I am sorry to say this but he is just a loser. I've been doing well this year.
Reply@adamantic, SVXY is "risk-controlled"?? >50% drawdowns don't happen in risk-controlled vehicles. Can you honestly put your hand on your heart and swear catching that crazy animal while it was subdued? Sold to you.
ReplyIPA I post administrator-calculated returns and my positions every month.
ReplyCan add you to the list if you want and you can see what I do in real time (or take pleasure in future travails when things don't work for me, up to you).
SVXY is risk-controlled because you know how much you can lose at all times.
Most short vol strategies have uncapped loss and don't compound. SVXY does this all for you so you can focus on your combined portfolio position.
Compare how you would risk manage a long SVXY position compared to short VIX futures or short S&P straddles.
That attitude is precisely why there is so much opportunity in the space right now.
And for the record my default position is long vol, not short.
@adamantic, I hope we are both here on the day when SVXY implodes, so then we can talk about how risk-controlled the loss was and exactly how much was lost. I don't have an attitude, I just think that when everyone is talking about so much opportunity in the space and is on one side of the trade I should look at taking the other. Glad to hear things are working out for you. I have posted my views on SVXY here ad nauseam. Not gonna brag about my returns on the trade. Let's just say I was not long during the most recent drawdown :)
Reply@IPA - I'm net short SVXY and have VIX calls such that I move my portfolio to 15% long VIX above 18.
ReplyShould we get that implosion, say 50%, the hedge will have contributed 15-20% cash.
In that lucky scenario I'll progressively flip the position, as I did in 2014, 2015 and post Trump. Missed brexit. I'll let you know in real time.
My VIX calls are unbounded, but SVXY is bound at zero, so I'll be able to move in size (percentage-of-portfolio-wise, anyway) while still being hedged against a further leg down.
Not a cheap position to carry, but it's peanuts compared to the movements in stocks that I'm hedging against.
Easiest when there's sharp 1-3 day drawdown, but fortunately that's the nature of the VIX. I've never managed to catch an equity market drop, and I've toasted a lot of cash trying.
The opportunity I was referring to has been in stocks and macro, not VIX.
Well I love a good prospectus--can TMM2 do a deep dive on the world of exotic ETFs and enlighten the world on where the bodies are buried??? Step up to the plate!
ReplyGetting back to the original subject--interesting related post I read today about "alternative risk premia" which I think drills deeper into the point I made about where the needs and demands are from clients/investors, or if you want to be less charitable, the current investment fad.
http://www.allaboutalpha.com/blog/2017/09/17/aon-alternative-risk-premia-viable-for-many/
What you'll see in the Aon report is a 30,000 view of alternative investment strategies that are driven by carry, value, and momentum. If you look at how the quant team at JPM divides up the world--and they carry a lot of influence--it is a similar setup: they divide the world into broad categories (equities, fixed income, FX, commodities) and then sub-divide into those buckets, and assess how the correlation, risk, and returns interact in each.
if you search for "macro" in the Aon report, you get zero hits. Where does a crafty macro manager that understands markets has a sustainable trading process/discipline, and a solid organization fit into that framework? Well, nowhere really. A decent (if unspectacular) record/sharpe will be seen as not repeatable, not exploiting a consistent pool of risk premia, or just plain lucky.
So yeah, Re: Hendry's record....certainly it is not a beautiful track record for the past few years, but that is the point: smart guy, good organization, the right philosophy--but he can't get it done. Does it mean the business doesn't have room for smart people that dig deep on a global scale? Of course not. But I believe it does mean that the market has segmented into something very different than what Soros lived in back in the 90s.
And to those who even casually dance on Hendry's grave while patting themselves on the back--it will happen to you. If you think profitably running a hedge fund is easy, you're not doing it...or not doing it right.
Lastly, I think Johno mentioned something even more important: Hendry is an all around great guy--and a humble one. That is *incredibly* hard to find in this business--and yet it is the reason he will be successful again in the future.
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