- Most hedge funds struggled during times of extreme market volatility, according to a new report from JPMorgan.
- But one subsector of the industry, macro managers, have thrived in market chaos, JPMorgan found, including during this year’s coronavirus sell-off.
- Now, institutional investors are turning to macro managers for diversification in their portfolios, and even considering small managers.
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Alan Howard has not let a crisis go to waste.
The billionaire co-founder of Brevan Howard has made eye-popping returns across his macro-focused funds after years of underperformance and redemptions. He made a personal best 18% in March alone, when the pandemic spread rapidly across the US, shutting down the global economy.
It was an exception in the hedge fund industry, where many funds — like quants and structured credit managers — were hit with losses and margin calls. But it wasn’t an exception for the macro world.
Managers like Greg Coffey’s Kirkoswald and Chris Rokos’ eponymous fund put up solid returns; Rokos has even re-opened to new money.
Even as the markets have calmed down in recent months, JPMorgan’s global market strategist David Lebovitz expects the demand for these types of managers to continue.
“Firms are being forced to think about how they build portfolios” in a low-interest rate environment, he said in an interview with Business Insider. Lebovitz works with the clients of the firm’s asset management business to understand what they are looking for in a money manager, and helps compile the firm’s Guide to Alternatives report.
Getting diversification and protection from equity markets is tough, and traditional sources for it — like high-quality bonds and real assets — have become expensive to hold.
“Increasingly, we are seeing people do this through hedge-fund strategies, in particular macro managers,” he said.
The average hedge fund, JPMorgan has found, loses money when the VIX — a measure of volatility in the markets — spikes. But macro managers have performed the best when volatility has been highest, with this year’s earlier sell-off being the latest example. While macro managers stagnated after the financial crisis, with smooth market conditions limiting their ability to outperform, their performance in the worst of times has attracted investors once again, Lebovitz said.
“We’ve now seen a couple moments of volatility where macro funds did what they are supposed to do,” Lebovitz said.
The flows have already started to trickle in, with Eurekahedge noting that $2.6 billion inflows went into the macro space in April alone. For the quarter before April, when markets were mostly calm until the pandemic hit the United States in mid-March, $22.6 billion were redeemed from macro funds, according to Hedge Fund Research.
But the biggest macro managers might be tough for managers to break into. Coffey has already closed his fund to new investors, and macro legends like David Tepper and Louis Bacon are mostly investing their own wealth.
This opens up a chance for smaller or new managers that are often filtered out of investors’ potential options because of their AUM or inexperience. Institutional investors don’t typically consider investing in managers with less than $50 million in assets under management, according to several banks’ capital introduction teams’ surveys of clients.
“They’re willing to give these managers a chance,” Lebovitz said of JPMorgan clients investing in hedge funds.
New macro managers on the horizon include Tepper’s nephew, Aaron Weitman, and his fund, CastleKnight Management.
Lebovitz at least thinks they’ll be needed.
“I don’t think the market is going to settle down anytime soon.”