Wednesday, October 10, 2012

Macro hedge funds stink at market timing

In spite of improved hedge fund performance during Q3-2012, hedge funds with Macro strategy focus continued to struggle (as discussed earlier).
HedgeWeek: - Macro hedge funds detracted from industry wide gains on weakness in trend following and commodity exposures, with the HFRI Macro Index posting a decline of 0.26 per cent; the September decline was the second consecutive monthly decline for macro. Systematic macro funds posted declines on short exposures to equities and commodity metals, as the HFRI Macro: Systematic/CTA Index posted a decline of 0.9 per cent. Discretionary macro and currency focused strategies had positive contributions from positions concentrated in Dollar/Euro, global equities and short fixed income.
Their poor performance can be explained in one sentence: Macro hedge funds are terrible at timing financial markets. The chart below shows Macro hedge funds' positioning in equities over time. "1" means maximum long allocation to equities (on a net basis) and "-1" means maximum short allocation. These investment "professionals" missed the rally from late last year into early this year (in spite of signs pointing to markets being oversold at the time). They also missed the correction this spring and early summer (in spite of signs pointing to froth in the markets) and then again missed the ECB-induced rally.

Source: Barclays Capital, Yahoo Finance


To be sure, predicting what central banks and politicians will do and how markets will be impacted is not an easy task. Many investors got whipsawed by some of these same events. But why is it that Macro hedge funds get paid 2/20 (or similar fees) and shouldn't they be better at this than the average investor?

And now they are positioned with a long bias. Given Macro funds' average track record recently, that bet does not bode well for the equity markets going forward.



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