Are you ready to ride the macro stallion?

February 06, 2014  

Performance chasing has left the arena – investors will take a more risk-based approach, as evidenced by the growing popularity of risk parity

By Niki Natarajan

As the celebrations for the Chinese New Year of the wood horse enter full sway, the race is on for a year that is likely to be marked by unbridled energy in the markets. The HedgeFund Intelligence global hedge fund composite ended the year up 9.23%, boosted by a 16% return from equity hedge funds, while even FoHFs ended the year up a noble 8.67% as their new futures have finally become a little bit clearer.

Of course, these hedge fund returns cannot compare to the performance of the S&P in 2013, up 32.41% making it the best year since 1997. As always hedge fund sceptics (albeit fewer than in previous cycles) have been arguing endlessly about the point of hedge funds when you can make twice as much in equities directly.

Returns perhaps, but what about alpha? Is alpha likely to become a fashionable word again in 2014? BlackRock Alternative Advisors’ Mark Woolley believes so. In a recent talk he showed how selecting the right managers can enhance alpha far more than just chasing performance. In strategies where there is greater dispersion of hedge fund manager alpha, a smart investor can really outshine by picking the right managers.

The stellar returns achieved by the winners at the recent EuroHedge Awards was testament to Woolley’s view. Of the 20 one-year winners, the average returns were 31.62% with the top performer Clareville Capital’s Pegasus Fund shooting out the lights at 63.78% in 2013, followed closely by the Tosca Opportunity fund up 56.14%.

Bubbles always burst and so the question is not if, but when? Hedge funds and other ways of managing this risk mitigate the importance of getting the timing completely right. Assuming that the S&P will eventually run out of steam many savvy investors such as K2 Advisors and Cube Capital predict that volatility will return to the markets paving the way for a global macro gallop.

Leaping over bursting bubbles is likely to make 2014 an exhilarating ride for those that are not of a faint heart, says Davina MacKail says in her annual alternative view. Global macro may have had –on average –a lacklustre run in the last few years, but one just needs to look at the 54% achieved by Laurentia in 2013 to know that manager dispersion in global macro is one place where money can be made by backing the right horse.

Fully convinced of the power of global macro, Betsy Battle, founder of Lone Peak Partners and an outspoken advocate of real untamed performance (as well as an accomplished horsewoman in her own right) is set to keynote in London at the InvestHedge Forum on 23-24 September 2014 to show us how to ride the macro stallion without having to neuter it.

There will be an early glimpse into Betsy’s unfettered thinking in the March issue of InvestHedge. But this month, however, just taking a look at the unique way that Pinnacle sees the world from a commodity point of view shows us that average is a word that needs to be ejected from the investment vernacular. Commodities are supposed to be another strategy in the doldrums but it is fascinating to see that so much more can be made of them beyond corralling in a few CTAs.

It looks like performance chasing may have bolted the stable, and the year of the wood horse is likely to see investors take a more risk-based approach, as evidenced by the growing popularity of risk parity.

This style of risk management has not only emerged as the risk-averse investor’s hedge against the inevitable hurdles that the financial markets throw up, but has also led to the growth of long-biased investing by some of the smartest hedge funds. AQR and Bridgewater seem to show that it is more about the manager than the strategy. In this issue, Susan Barreto explores whether or not managing money in this way is actually far smarter than in the traditional modern portfolio theory of 60/40 equity/bond allocations.

“Risk input equals return output,” says Woolley, who believes that 2014 will be defined by that four letter word. But before taking on risk for the sake of returns, a look at how risk takers operate from a neuroscience point of view might mitigate a few disasters. In his book, The Hour Between Dog and Wolf, John Coates, a former trader and neuroscience researcher, explains the biology of a risk taker, allowing investors to really assess risk management from a behavioural finance stand point.

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