Macro hedge funds fill the exploding year their peers are keen to forget

Hedge fund trading in bonds and currencies is on track for its best year since the global financial crisis, buoyed by sharp rises in interest rates that have inflicted huge losses on equity professionals and ordinary investors.

So-called macro hedge funds, made famous by the likes of George Soros and Louis Bacon, endured a barren period when markets leveled off with trillions of dollars of central bank bond-buying after 2008. But they have boomed this year thanks to seismic moves in global bond markets and a bullish rally for the dollar as the Bank of America struggles The US Federal Reserve and other central banks high inflation.

Among the winners was billionaire trader Chris Rokus, who recovered from losses last year to gain 45.5 per cent in 2022, helped by bets on rising interest rates, including during the British market turmoil in the fall. It leaves co-founder Brevan Howard on track to have his best year since launching his private fund, now one of the largest macro funds in the world with assets of about $15.5 billion, in 2015.

Caxton Associates CEO Andrew Low posted gains of 30.2 percent through mid-December in the $4.3 billion Macro fund, which has been closed to new money, according to an investor. New York-based firm Hyder Capital has gained 194 percent in its Jupiter Fund, helped by bets on bonds and commodities, which at one point this year are up more than 270 percent.

said Kenneth Trubin, president of Graham Capital, which he founded in 1994, referring to the strong periods for macro traders in the 1980s, 1990s and early 2000s.

“They were really hedge funds that were intentionally unrelated to people’s latent exposure in stocks and bonds,” Trobin added.

Global stocks are down 20 percent this year, while bonds posted their biggest drop in decades, making 2022 a year to forget for most asset managers. But hedge funds that can bet on bonds or treat currencies as an asset class have jumped ahead. Total funds rose on average 8.2 percent in the first 11 months of this year, according to the HFR dataset. This puts them on track for their best year since 2007, during the onset of the global financial crisis.

Traders benefited from bets on rising returns, as in the case of the two-year US debt, whose yield rose from 0.7 percent to 4.3 percent, and the 10-year debt, which rose from 1 percent to 3.6 percent. The Bank of Japan’s sudden change in yield curve control policy, which sent Japanese government bond yields higher, boosted yields even further.

“They gave every macro trader a nice Christmas – even the desk security guards are short Japanese government bonds I think,” said one macro hedge fund manager.

With the “artificial volatility suppression” of ultra-loose monetary policy now gone, macro traders will likely continue to benefit from their economic research, said Darren Wolf, global head of investments and alternatives at Abrdn.

Computer-based hedge funds have also benefited, as many market movements provide long-term trends. These so-called futures funds under management are up 12.6 percent, the best year of returns since 2008.

London-based Aspect Capital, which manages about $10 billion in assets, gained 39.7 percent in its flagship diversified fund. It has benefited from markets including bonds, energy and commodities, with its largest single win coming from bets against UK bonds. Leda Braga’s company Systematica has gained a 27 percent stake in its BlueTrend fund.

“We are in a new era in which the unexpected continues to occur with alarming regularity,” said Andrew Beer, managing director at US investment firm Dynamic Beta. He added that jumping returns and fast-moving currencies provide opportunities for trend-following funds.

The gains stand in sharp contrast to the performance of stock hedge funds, many of which endured a miserable year as high-growth but unprofitable tech stocks that had jumped into the bull market plunged on rising interest rates.

Chase Coleman’s Tiger Global, one of the biggest winners of high-tech stocks at the height of the coronavirus pandemic, has lost 54 percent this year. Andreas Halvorsen Viking, which exited the stock trade at very high multiples early this year, lost 3.3 percent through mid-December.

Meanwhile, Boston-based technology-focused fund Whale Rock lost 42.7 percent. Skye Global, set up by former Third Point analyst Jimmy Stern, lost 40.9 percent, dragged down by losses in stocks such as Amazon, Microsoft and Alphabet. Stern wrote in an investor letter seen by the Financial Times that he was wrong about “the severity of the overall risk.”

Equity funds overall are down 9.7 percent, which puts them on track for their worst year of returns since the 2008 financial crisis, according to HFR.

“Our biggest disappointment came from these managers, even well-known ones with long track records, who failed to anticipate the impact of higher growth rates on growth stocks,” said Cedric Foigner, head of liquid alternative managed funds and research at SYZ Capital. “They didn’t realize the paradigm shift and buried their heads in the sand.”

Excluding 2020, this year saw the largest gap between the top and bottom decile of hedge fund performance since the fallout from the 2009 financial crisis, according to HFR.

“Over the past 10 years, people have been rewarded for investing in associated hedge fund strategies [market returns]Tropin of Graham Capital said. “However, 2022 was the year to remind you that a hedge fund should ideally give you diversity as well.”

Additional reporting by Katie Martin

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