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Macro hedge funds are toasting a failed year that peers want to forget

Hedge funds that trade bonds and currencies are on track for their best year since the global financial crisis, boosted by a sharp rise in interest rates that has inflicted heavy losses on equity specialists and mainstream investors.

So-called macro hedge funds, made famous by the likes of George Soros and Louis Bacon, endured a barren period when markets were soothed by trillions of dollars of central bank bond purchases after 2008. But they have thrived this year thanks to seismic moves in global bond markets and a rising dollar while the US Federal Reserve and other central banks are fighting rising inflation.

Among the gainers was billionaire trader Chris Rokos, who recovered from last year’s losses to gain 45.5 percent in 2022, helped by bets on rising interest rates, including during the autumn turmoil in the UK market. That leaves co-founder Brevan Howard on track for his best year since launching his own fund, now one of the world’s largest macro funds with about $15.5 billion in assets, in 2015.

Cakton Associates CEO Andrew Law had gained 30.2 percent of his $4.3 billion Macro fund as of mid-December, which is closed to new money, according to the investor. Said Haidar’s Haidar Capital, based in New York, gained 194 percent in its Jupiter fund, helped by bets on bonds and commodities, as it rose more than 270 percent at one stage this year.

“It reminds me of the early part of my career when macro funds were the dominant style of investing,” said Kenneth Tropin, chairman of $19 billion Graham Capital, which he founded in 1994, referring to the strong periods for macro traders. 1980s, 1990s and early 2000s.

“They were really hedge funds that were deliberately uncorrelated with people’s underlying exposure in stocks and bonds,” Tropin added.

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

Traders profited from bets on rising yields, such as the U.S. two-year note, which rose from 0.7 percent to 4.3 percent, and the 10-year note, which rose from 1 percent to 3.6 percent. A surprise shift by the Bank of Japan in its yield curve control policy, which sent yields on Japanese government bonds rising, provided an additional boost to yields.

“They gave every macro trader a wonderful Christmas — even the office custodians are short Japanese government bonds, in my opinion,” said one macro hedge fund manager.

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

Computer-managed hedge funds also benefited, with many market moves securing long-term trends. These so-called managed futures funds rose 12.6 percent, their best year of returns since 2008.

London-based Aspect Capital, which manages about $10 billion in assets, has acquired 39.7 percent of its flagship Diversified fund. It has profited in markets including bonds, energy and commodities, with its biggest single gain coming from a bet against British gilts. Leda Braga’s Sistematica received 27 percent in its BlueTrend fund.

“We’re in a new era where the unexpected happens with alarming regularity,” said Andrew Beer, managing member of US investment firm Dynamic Beta. Surging yields and fast-moving currencies presented opportunities for trend-following funds, he added.

The gain contrasted sharply with the performance of stock hedge funds, many of which have endured a miserable year as growing but unprofitable tech stocks that rose in a bull market fell sharply as interest rates rose.

Chase Coleman’s Tiger Global, one of the biggest gainers thanks to rising tech stocks at the height of the coronavirus pandemic, has lost 54 percent this year. Andreas Halvorsen’s Viking, which exited shares trading at very high multiples earlier this year, had lost 3.3 percent through mid-December.

Meanwhile, Boston-based Whale Rock, a technology-focused fund, lost 42.7 percent. And Skye Global, founded by former Third Point analyst Jamie Stern, lost 40.9 percent, hit by losses in stocks such as Amazon, Microsoft and Alphabet. In a letter to investors seen by the Financial Times, Sterne wrote that he was wrong about the “severity of macro risks”.

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

“Our biggest disappointment came from those managers, even well-known ones with a long track record, who failed to predict the impact of rising rates on growth stocks,” said Cedric Vuignier, head of liquid alternative funds and research at SIZ Capital. “They didn’t recognize the paradigm shift and buried their heads in the sand.”

With the exception of 2020, this year marked the largest gap between the top and bottom deciles of hedge fund performance since the 2009 financial crisis, according to HFR.

“Over the last 10 years, people have been rewarded for investing in hedge fund strategies correlated with [market returns]”said Tropin of Graham Capital. “However, 2022 was the year to remind you that a hedge fund should ideally also provide you with diversity.”

Additional reporting by Katie Martin

laurence.fletcher@ft.com

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