Macro Funds Are Designed to Outperform When Markets Tank. January Put Them to the Test.

Macro strategies delivered gains in an otherwise rocky month for investors, according to HFR.

Illustration by II (Michael Nagle/Bloomberg)

Illustration by II

(Michael Nagle/Bloomberg)

The financial markets were battered by extreme volatility in January, but macro hedge funds saw strong, negatively correlated gains in the choppy environment, according to a Hedge Fund Research report.

“In 2021 and 2020, higher beta strategies were the best performing strategies; risk-on dominated over that period of time,” Kenneth Heinz, president of HFR, told Institutional Investor. “January was the opposite of that — equities declined, fixed-income declined, and commodities were up.” Heinz said that compared to most investment methodologies, macro strategies generally produce the lowest returns, but their relatively low correlation to short-term market movements can make them a perfect antidote to a tough, volatile market environment like the one seen in January.

HFR’s macro index gained 0.85 percent in January, and the HFRI 500 Macro Index grew 1.35 percent. Each of the sub-strategies that come under the macro umbrella — commodity, discretionary, and quantitative — yielded positive results this month, an occurrence that Heinz called “interesting.” He said that when macro strategies see a strong month, it’s typical for one sub-strategy to see positive performance while another experiences a downturn, but it’s relatively rare for each of the sub-strategies to be in the green.

“I think it really comes down to being positioned for inflation, for higher interest rates with bond commodities, [with] short-duration or short fixed-income altogether, and [with] short exposure to equities with a long volatility bias,” Heinz said.

One example of such good positioning is Haidar Capital Management, a New-York-based hedge fund manager that experienced its strongest month to date in January, surging 30.65 percent, as II previously reported. Haidar’s portfolio was comprised mostly of positions in commodities and fixed income, which helped insulate it from the big tech selloff.

Jonathan Caplis, chief executive officer at PivotalPath, a hedge fund research organization, agreed, saying that in general, macro funds were well positioned for the month of January. PivotalPath’s macro index generated a 2.6 percent return last month, and the commodities, discretionary, and risk premia sub-strategies held the top three positions. “Dispersion, however was the highest it has been since March of 2020, and the average return of these strategies were positively skewed by some outsized returns from a relatively small subset of funds,” Caplis told II in an e-mail.

Caplis also said that while strategies like macro and managed futures, which average low beta and are negatively correlated to the equity markets, perform well during selloffs in traditional asset classes, it’s not necessarily what created the favorable conditions for them. “Continuing trends in fixed income and commodities created the ‘optimal environment,’” he said.

Last month wasn’t as strong for fixed income-based strategies: The HFRI Relative Value Index saw a narrow gain of 0.1 percent last month, and the HFR 500 Relative Value Index experienced a decline of 0.2 percent. In terms of sub-strategy performance, fixed income was a mixed bag. HFR’s yield alternatives index, which Heinz said acts as a “catch-all for private niche things” like MLPs and real estate, gained 1.3 percent. The fixed-income corporate index gained 0.6 percent. Meanwhile, HFR’s fixed-income and convertible arbitrage index fell 0.14 percent in January, while its volatility index declined 0.93 percent.

Rajay Bagaria, president and chief investment officer at Wasserstein Debt Opportunities, said that if interest rates go up, he anticipates a recession and a large selloff in both the equity and the credit markets. “It’s a great time to really consider de-risking hard,” Bagaria told II.

Bagaria said that institutional investors may be able to insulate themselves from an increasingly volatile macro environment by limiting exposure to high-yield products that are sensitive to the yield curve, such as high-yield ETFs, and getting into the leveraged loan market. “Leveraged loans have a floating rate of interest, so as rates go up, they pay more. It’s a very defensive asset class in this market,” Bagaria said. “This is the safety trade in all of fixed-income, not just high-yield.”