Global Macro, the come-back kid
'Global Macro,' the Strategic Sequel
As Wall Street firms hunger for dependable trading profits, an out-of-favor strategy is making a comeback.
Now that volatility has returned and interest rates are moving, some traders using a so-called global macro strategy are thriving. By betting on economic trends in currencies, interest rates and other instruments around the world, these traders have been scoring big gains.
Last year, global macro funds rose more than 17% on average, according to Credit Suisse/Tremont Hedge Fund Index. These funds gained 1.7% on average in January, according to Hedge Fund Research, a Chicago-based research firm.
One of the funds with the biggest gains is Alan Howard's $20 billion Brevan Howard Asset Management LLP. The London-based fund racked up winnings of about 10% last month, even as many hedge funds sputtered and global stock markets tumbled. Mr. Howard's profits come on the heels of gains of 25% in 2007 for his firm's flagship hedge fund.
Other winners include GLG Partners Inc.'s macro fund, managed by Greg Coffey, which was up 51% last year, and Peter Thiel's Clarium Capital Management, which jumped more than 24% in January and more than 40% in 2007.
These kinds of funds can include a variety of styles — and returns vary wildly. Paul Tudor Jones's Tudor Investment Corp., one of the largest and most respected macro funds, gained less than 1% in January, investors say, while Goldman Sachs Group Inc.'s Global Alpha fund has been struggling.
The bond market's volatility, falling interest rates and a steep yield curve in the U.S. — or a difference in yields between short- and long-term debt — is causing the "sort of environment that is very good for macro managers," says Gary Vaughan-Smith, a partner at London-based SilverStreet Capital LLP, which has about $700 million under management.
That is advantageous for someone like the 44-year-old Mr. Howard. His firm is blossoming, soaring from $12.5 billion at the beginning of 2007 to become one of the largest hedge funds in the world. Other macro-oriented hedge funds have become hot tickets, too, investors say. Popularized by billionaire investor George Soros, macro trading was widely practiced two decades ago. But its popularity waned as the global economies turned calm, rising in unison.
The macro strategy "seems to be the only thing that is performing in this current period of market upheaval," says Omar Kodmani, senior executive officer in London at Permal Group, a fund of hedge funds that is a unit of Baltimore investment company Legg Mason Inc. It is among investors that have been adding money to macro funds like Brevan Howard over the past year.
In recent years, Brevan Howard's annual gains weren't particularly extraordinary — about 10.5% on average. But Brevin Howard specializes in short-term trades that generally profit as interest rates in developed nations fall, a stance that has helped lately. The fund also has profited from a series of currency investments. It does a bit of stock trading, too, in recent months sticking with consumer staples.
Brevan Howard steers clear of so-called credit wagers, or investments that depend on the improving or deteriorating quality of a company's credit, difficult terrain in the past year. Mr. Howard's traders work independently, judged on their performance. That strategy creates a competitive environment that rewards top performers, say people close to the firm.
As chief investment officer, as well as chief executive, Mr. Howard is responsible for 20% of the flagship fund's investment portfolio, as of October 2006, according to regulatory filings. Mr. Howard, who sits in the middle of the firm's trading room surveying his traders, contributes to Israeli and other charities, such as Holocaust education. He lives near several of his firm's senior partners in Hampstead, an affluent, leafy London neighborhood.
He received a master's degree in chemical engineering in 1986 from London's Imperial College of Science and Technology. Working as a trader for Credit Suisse, Mr. Howard itched to start his own hedge fund as the firm became more conservative under then-head John Mack. But he told an acquaintance that he wouldn't quit the bank unless he could raise $500 million to $1 billion.
He did exactly that, leaving Credit Suisse in 2002 and starting Brevan Howard with $870 million, increasing it to $1.2 billion in its first month. Brevan Howard now invests money for Credit Suisse and the bank acts as a broker for the fund.
Last spring, Mr. Howard raised about €770 million ($1.13 billion) from listing a fund called BH Macro on the London Stock Exchange, falling short of the €1 billion he had hoped to raise, as some investors weren't impressed, at the time, by the firm's returns. Proceeds of the listing were invested in the flagship Master Fund, which is otherwise closed to new investors.
Brevan Howard executives are upbeat that the recent big gains will continue, anticipating that interest rates in a number of countries will head even lower. In a recent shareholder letter, they said they expect the European Central Bank to hold rates steady, that the U.S. is likely to slip into a recession and that the economy of the United Kingdom will continue to slow.
The firm also expects the problems in the banking sector to continue and the "punishing recession" in residential investment to spill into other sectors, it says in the shareholder letter. "In short, [Brevan Howard] sees anemic growth in 2008 with downside risks," the letter adds.