Macro Investors: Masters of a New Global Order
Winton Capital's David Harding is one of a small group of veteran macro managers who are profiting from the chaos of the global economic crisis. These macro investors are applying distinct investment strategies to deliver double-digit returns.
By Loch Adamson
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At 9:30 every weekday morning in a pristine, century-old stone mansion in Rowayton, Connecticut, Kenneth Tropin gathers the seven members of his risk committee to perform what has become, since November 2007, a 30-to-40-minute ritual: the forensic parsing of risk. Tropin, the 55-year-old founder and chairman of Graham Capital Management, initiated the meetings as a way to stay nimble and responsive to the ever-evolving global financial crisis and safeguard the firm’s $4.9 billion in assets under management. Through the lens of their macro trading strategies, Tropin and his team scrutinize market risk, liquidity risk, cash management, margins, counterparty risk, operational risk and strategy-specific risk, delving into each portfolio manager’s gains and losses from the previous day. Nothing is left to chance.
Their greatest test to date, Tropin says, came unexpectedly one cold Sunday evening — March 16, 2008 — when Bear Stearns Cos. crumbled. That night, Mark Werner, Graham’s president, called Tropin to warn him that the investment bank was on the verge of insolvency. The two men promptly rallied the members of their risk committee and worked the phone lines, calling every one of Graham’s 15 portfolio managers, as well as the trading desk that was responsible for executing the firm’s program trades, to discuss the potential impact on Graham when the markets opened the next morning.
Their vigilance paid off. In the weeks before the crisis hit, the risk committee had moved all of its trade execution away from Bear, and by the end of the night, Tropin was confident that the business he had spent 15 years building was safe. His systems would be able to execute their programmed trades; his portfolio managers were on the right side of the markets, poised to make money. And they did. Every one of Graham’s 13 funds was profitable in 2008; the majority delivered double-digit returns ranging from 11 to 52 percent, net of fees. For all his success, however, the impeccably groomed Tropin sounds frustrated when he describes the widespread aversion to global macro strategies among the major institutions that invest in hedge funds.
“For a long time there was a perception that the biggest returns, the best risk-adjusted returns, were in strategies other than macro,” Tropin says. “A decade ago some people began saying macro was dead, but I don’t think it was ever really dead — it just wasn’t producing the kinds of returns that investors were getting out of other strategies, like arbitrage.”
Once synonymous with the hedge fund industry, when the likes of Julian Robertson Jr., George Soros and Michael Steinhardt made sweeping bets on currencies, interest rates, stocks, bonds and commodities around the world, macro fell out of favor for years: Assets under management in the strategy, as a percentage of the global total invested in hedge funds, declined every year from 1993 through 2000, falling from 33.4 percent to just 11.6 percent, according to Chicago-based Hedge Fund Research. Although macro totals recovered slightly in the aftermath of the equity market implosion early this decade, assets started drifting away again from 2004 through 2007, dropping from 19.1 percent of the total to 15.4 percent, as cheap financing fueled the growth of a whole range of arbitrage and relative-value strategies. Deemed too volatile and idiosyncratic by many institutions, macro allocations languished. Macro managers’ emphasis on delivering uncorrelated returns, rather than beating a known benchmark, didn’t resonate with prospective clients. In an era of benign global growth, macro just didn’t seem to make sense.
Oh, how the world has changed.
Over the past 22 months, in the wake of what many are calling the worst financial crisis since the Great Depression, the masters of a new global order — many of whom have been quietly plying their craft away from the limelight for more than a decade — are reasserting their power. In 2008 macro funds posted average industrywide returns of 5 percent, according to HFR, a remarkable achievement in a year that saw the typical hedge fund fall by 19 percent and the Standard & Poor’s 500 index crater by 38.5 percent. Such battle-tested macro investors as Tropin, David Gerstenhaber, David Harding and Paul Touradji did even better, delivering double-digit returns across many of their funds — but their investment strategies are as distinct as their thumbprints. At one end of the spectrum are the classic discretionary macro managers like Gerstenhaber and Touradji, who take a big-picture view of the markets; at the other are systematic traders and statisticians like Harding and Tropin, who design mathematical models to capture economic trends without regard to the market’s direction. But whatever the approach, all macro managers still face an uphill struggle to work their way through investors’ outdated assumptions about one of the hedge fund industry’s most original, individualistic strategies.