Global Macro Mutual Funds -- A Primer.
Among the growing number of hedge fund-like strategies appearing in mutual fund form, investors can now choose from "global macro" funds. These funds can follow a myriad of investment philosophies, as demonstrated by the fact that the most cited global macro hedge fund index, the HFRI Macro Index, has six distinct sub-components: active trading index, discretionary thematic index, systematic diversified index, commodity index, currency index and multi-strategy index.
In the mutual fund world, most macro funds have found a home within either Morningstar's multi-alternative or nontraditional bond categories. One size most certainly does not fit all in this space; however, there are common factors across global macro strategies.
For one, most global macro funds have the flexibility to trade across all major asset classes: equities, fixed income, commodities and currencies. Additionally, macro funds often take advantage of trends, perhaps related to major economic policies, capital flows or relative valuations, to name a few.
Idiosyncratic risk, or company specific risk, typically doesn't play a large role, as macro managers tend to be more concerned with systematic risk exposure; that is, broad thematic exposure. Lastly, while the risk exposure in macro funds can vary widely, both across funds and within a single fund over time, these funds do tend to be directional, either long or short, as opposed to being tightly hedged. As such, investors in macro funds should be willing to bear meaningful risk at times, even if the risk exposures aren't persistent.
(Related: Hedge Fund Assets Increase for Third Straight Quarter: HFR)
The HFRI Macro Index goes back to December 1989, and while hedge fund indexes are far from perfect, serves as a reference point for the efficacy of this disparate group of strategies. Consider the following:
Granted that point-in-time statistics can hide a lot, overall, macro funds have generated an attractive return with significantly less volatility than global equities. Further, we can infer from the bear market correlations and down-market capture ratios that much of their outperformance is a result of protecting capital in down markets. To gain additional insight into that idea, we can observe specific times of crises to understand the potential protection afforded by these strategies.
The Gulf War (August 1990 -- January 1991)
HFRI Macro = 0.3%
MSCI World = -7.9%
The Asian Crises (July 1997 -- October 1997)
HFRI Macro = 6.0%
MSCI World = -2.6%
The Russian Debt Crises and Collapse of LTCM (August 1998 -- September 1998)
HFRI Macro = -4.2%
MSCI World = -11.8%
The Dot-Com Bubble (April 2000 -- September 2002)
HFRI Macro = 12.9%
MSCI World = -46.8%
The World Trade Center Attack (September 2001)
HFRI Macro = 0.6%
MSCI World = -8.8%
Global Financial Crisis (June 2007 -- February 2009)
HFRI Macro = 11.8%
MSCI World = -51.9%
The devil is indeed in the details, so we would argue against taking too much comfort in the aggregate performance of the peer group during these difficult times. Having said that, macro strategies at least have the ability to protect on the downside.
For investors interested in allocating to macro strategies, the question is one of portfolio construction. How an investor should fund an allocation to a macro strategy depends on the specifics of the strategy. For equity-centric strategies, investors would be best served by allocating from their equity bucket, whereas a more tightly risk-managed approach, implemented with fixed income and currencies and exhibiting low correlations to equities, could be appropriate in either the "alternatives" or fixed income buckets. Whatever the strategy, the critical point is to ensure that the risk exposures align with those of the funding source or the risk parameters of the portfolio as a whole. The sum of the parts of a portfolio is what matters, not the pieces in isolation; but global macro strategies can enhance the overall risk/return profile of a diversified portfolio.
--- Read Interval Funds: Pros & Cons of an Alternative Investment You May Have Never Heard Of on ThinkAdvisor.