Tough Era for 'Macro' Funds

Tough Era for 'Macro' Funds

By TOM LAURICELLA

Today's markets seem like they are tailor-made for money managers investing based on big-picture, "macro" themes such as the European debt crisis and economic woes in the U.S. Instead, many are struggling.

Macro-focused managers have been tripped up by whiplash-inducing swings in stocks, currencies and commodities, often brought about by the latest twists and turns of impossible-to-time political developments. Stubbornly low U.S. Treasury yields have been a trap for managers worried about inflation and the deteriorating U.S. fiscal outlook. Making matters worse is a tendency of markets around the world to move in lock step.

.Even when events play out as predicted, the markets haven't responded the way many had expected. A prime example is the euro, which has risen against the dollar even as the European debt crisis has worsened.

"It's been a very difficult period," says Mark Enman, who oversees research on global macro hedge funds for Man Investments, a unit of Man Group PLC. "There's a lot of angst and 'woe is me' out there. The mood is not great."

Macro funds generally hunt among global financial markets in search of opportunities created by big-picture economic, fiscal and political trends. In the first half of 2011, the HFRX Macro Index, which tracks the performance of 500 hedge funds that follow a macro strategy, fell 2.2%. The index lost 1.8% in June after a 2.2% drop in May.

By comparison, the Standard & Poor's 500-stock index gained 5% through the end of June, and the MSCI All Country World Index rose 3.4%. In the bond market, the Barclays Aggregate index, which tracks investment-grade bonds issued in the U.S., gained 2.7% in the first half of the year. And over the past 12 months, the 6.9% gain in macro funds pales in comparison to gains in many stock markets that topped 20%. "The markets have fooled a lot of people," says veteran hedge-fund trader Victor Sperandeo, head of Alpha Financial Technologies.

Some of the biggest names are having a tough 2011, according to people with knowledge of the returns. So far this year, Moore Capital Management LP's Remington Investment Strategies has lost 3.9%. Fortress Investment Group LLC saw its Macro Fund lose 1.8% in June and 3.6% for the first half, the people said. At Tudor Investment Corp., the firm's flagship BVI Global fund lost 2.9% in June having gone into last month flat for the year, according to people familiar with the matter.

Of course, not all managers are in the red.

At Brevan Howard Asset Management LLP, the firm's $25 billion Master Fund posted a 0.8% gain in June and is up 4% for the year, according to people familiar with the matter.

For many, the performance woes come at a time when investors are pouring money into macro hedge funds. In the first quarter, macro funds took in $11.9 billion, more than one-third of all new hedge-fund investments, according to Hedge Fund Research. That contrasts with the 7% in the first quarter of 2010. But macro trends lately have been short-lived, and market swings have been particularly sharp.

"Outside of the credit markets in Europe, everything has been range-trading with very low liquidity," says Guillermo Ossés, a managing director at HSBC Global Asset Management. "People put on a position, the market moves against them, and they get stopped out," meaning they have to quit their position, he says. "Then they reverse course, the market moves against them, and they get stopped out again."

The end of June was particularly painful. Many fund managers belatedly turned bearish on stocks as the global economy weakened. But the S&P 500 surged more than 4% in the final days of the quarter.

That reversal came a week after many traders were blindsided by the International Energy Agency's plan to release 60 million barrels of oil into the market, sending oil prices sharply lower.

Another challenge has been the tendency for markets around the world to move in synch—the "risk on, risk off" trading seen since the financial crisis. When investors are in "risk on" mode, they bid up investments such as stocks, and sell safer assets such as U.S. Treasurys.

That lock-step trading has been a problem for stock pickers and macro managers alike. Among funds focused on so-called long-short strategies, which involve betting on and against stocks, a tendency for many individual stocks to move together has made it extremely challenging, traders say.

With Spain's economy in bad shape, one trade for a macro manager might be to bet against Spanish stocks and buy German stocks. "But even though Spain is one of the countries in the worst shape, its index rallies along with everything else," says Mr. Sperandeo of Alpha Financial Technologies. "We live in a very correlated world, and there's very little you can do to diversify."

Many macro managers have also been frustrated by the buoyancy of the U.S. Treasury market. When the U.S. economy improved in the first quarter, they jumped on bets that prices of long-term Treasurys would fall. Instead, the economy softened and, despite the political bickering over raising the debt ceiling, Treasurys rallied.

"Not too many [macro] guys made money in Treasurys, but plenty of people lost money," says Man's Mr. Enman.

Even with the European debt crisis, where many macro managers correctly expected conditions to deteriorate, making money has been a challenge. The crisis led many to bet the euro would fall. Instead, it has gained 7% against the U.S. dollar this year.

Write to Tom Lauricella at tom.lauricella@wsj.com