Ian Bremmer is one of the smartest people I know. He’s the founder of Eurasia Group, a global political
risk research and consulting firm. His
expertise is geopolitics. Mine is alternative investments. Both of us think 2015
will be a year to remember, although for
In an Altegris webinar, Bremmer
outlined four impending crises, with
worsening relations with Russia topping the list, followed by the fight
against ISIS, China’s muscle-flexing in
the Pacific and struggles in Europe. My
prediction is that the tumultuous global
political and economic landscape could
benefit global macro hedge funds and,
by extension, strengthen the argument
for active management.
For many of us, global macro funds
were our introduction to hedge funds.
Three legendary hedge fund investors,
George Soros, Julian Robertson and
Michael Steinhardt, made huge profits
in the ‘80s and ‘90s with gutsy moves,
most memorably Soros’ correct $10 billion bet that the British pound was overvalued. They showed us there was a way
to invest beyond stocks and bonds.
In the world of active managers, global macro fund managers are arguably
the most active of them all. They have
no index, no S&P 500 or Russell 2000
against which to measure their performance or invest in. They might go long
or short equities, bonds, currencies or
commodities, and they often reinforce
their positions with leverage and derivatives. These “go anywhere” funds scour
developed and emerging markets, trying
to anticipate macro events and placing huge bets on those outcomes. They
thrive on uncertainty and conflict.
Global macro hedge funds have posted ho-hum results since 2008, though.
Volatility has been at historic lows. In
their attempts to stimulate economic
growth and escape deflation, central
banks around the globe have printed money, kept interest rates low and
bought up fixed-income instruments.
The result has been that bond prices
have gone up and yields have gone
down. Investors have shifted assets to
“risk-on” assets such as equities, sending many of those markets higher. In an
environment of low volatility and rising
equities markets, active managers have
a hard time distinguishing themselves.
Their lackluster performance has
generated lots of talk about the end of
active management, none as provoca-
tive as Charles Ellis’ recent article, “The
Rise and Fall of Performance Investing,”
in the Financial Analysts Journal. Ellis
argued that active management is the
victim of its own success. In his view,
the thrill of beating the market attracted
so many smart, talented young profes-
sionals over the past 50 years that the
task of finding mispriced securities has
become much harder. All those analysts
poring over all that information have
researched the inefficiencies away. It’s
become much harder to match the mar-
kets, let alone beat them, especially after
taking costs and fees into account.
I don’t disagree with Ellis that pric-
ing errors were much easier to find in
the past. However, despite a fire hose of
information, markets are still inefficient—
smart managers can and do outwit the
market. Moreover, passively-managed,
cap-weighted index strategies still have
the problem of favoring yesterday’s win-
ners—and as we know, it’s hard for yester-
day’s winners to continue to outperform.
If you are going to predict the fall of
active management, perhaps it’s best to
wait until the current bull market is over.
Active managers have historically under-
performed in rising markets, but have
the opportunity to outperform on the
downside. The period of outperformance
for active managers came when interest
rates were steadily rising, and under-
performance occurred during the many
years of falling interest rates, according
to a recent study by Barron’s. A five-year
bull market, fueled by falling rates, was
a perfect scenario for passive indexing.
That scenario looks likely to change.
The consensus calls for rising interest
rates in the U.S. in late 2015 or early 2016.
It’s a similar story for Britain, and eventually rates are expected to rise again in
Europe, once it emerges from its recession. The role of central banks should
recede, and the role of the global macro
investor could re-emerge. If Eurasia
Group’s Bremmer is right and 2015
becomes a year of political turmoil, the
global macro funds will find themselves
in familiar—and welcome—territory.
Jon Sundt is president and CEO of Altegris.
By Jon Sundt
Is This the Year of the Global Macro Investor?
Pricing errors might be harder to find, but that doesn’t mean markets are
no longer inefficient