February 15, 2007

'Macro' Gang Hangs Tough High-Rolling Hedge-Fund Strategy Gets Whupped, but Is It Payback Time? By ALISTAIR MACDONALD and MARGOT PATRICK February 15, 2007; Page C1 Betting on the world's broad economic trends tripped up some high-profile names in the hedge fund industry last year, but such "global macro" investing is poised for a comeback this year, money managers say. Global macro was among the first widely practiced hedge-fund strategies. It helped popularize these private-investment vehicles after money managers George Soros, Julian Robertson and other early practitioners saw stellar returns by betting on economic trends via investments in currencies, interest rates, shares and other instruments. GLOBAL PLAYERS • The News: It looks like it will be easier in 2007 for hedge funds to profit from bets on the world's economies. • The Reason: After years of relative calm, economists predict bigger economic swings, and hedge funds make the most money when there's lots of volatility. • The Risk: Although winners can win big in global-macro investing, losers can lose just as big. The strategy hit a rough patch last year because the world's economies have been relatively calm, gently rising more or less in unison. Moreover, many global-macro investors were caught short by the resilience of the U.S. economy, which they had bet would be weaker than it was. Global macro, like other hedge-fund strategies, profits from bets on big swings, or volatility. If things don't go up or down much, there isn't much money to be made, whether betting on pork bellies or the price of the euro versus the yen. This year could be different, as many economists predict volatility after an extraordinary period of relative calm. They point to various factors: Rising inflation in some parts of the world could prompt central banks to raise interest rates. Record-high personal debt in some developed countries could cause a jolt if an economic downturn prompts defaults to surge. Such things can pave the way for shifts in bond yields, currencies values and stock prices -- all fodder for global-macro funds. "The world's major economies are less synchronized than they have been, and that creates opportunities," says Neil Meadows, a portfolio manager at NewFinance Capital. The London-based firm, part of British fund manager Schroders PLC, last year launched a fund of macro hedge funds with its own money. Hedge-fund investors surveyed by Deutsche Bank AG are predicting the strategy will be the second-best performer this year, after the plain-vanilla strategy of buying some stocks and shorting others (selling borrowed shares in hopes of replacing them with cheaper ones later and pocketing the difference). About two-thirds said they currently were invested in macro funds, and one-third said they would add to their global-macro exposure in 2007. Even if expectations pan out, global macro is by no means easy money. Returns vary wildly because there are so many possible bets. Some investors are attracted to this approach because they think the choices mean opportunities. These funds typically have seen their best performances around times of market crises, but they also see their worst performances in such years when managers bet wrong. "The real struggle is not how much you want to invest in global macro, but who you allocate to," says Nicolas Campiche, chief executive of Managers Selection Services at Swiss private bank Pictet & Cie., which has about $20 billion invested in hedge funds. Last year, the average return of global-macro funds in Pictet's portfolio was about 10%, yet the results of those funds ranged from a 10% loss to a 44% profit. Overall, global-macro funds registered an average return of 8.23% in 2006, compared with a 12.88% gain on Chicago-based Hedge Fund Research Inc.'s composite index of hedge-fund returns and a 13.6% rise in the Standard & Poor's index of 500 big U.S. stocks. Among high-profile global-macro managers posting double-digit 2006 losses: Vega Asset Management LLC's Ravinder Mehra; Rubicon Fund Management LLP's Paul Brewer; and the pair of Goldman Sachs alumni who run SemperMacro, Christian Siva-Jothy, a trader for the bank, and Gavyn Davies, Goldman's former chief economist and onetime British Broadcasting Corp. governor. Some global-macro funds managed to generate strong profits last year. New York-based Drake Management LLC returned 41% on its Drake Global Opportunities Fund, in part by betting against U.S., U.K. and Japanese government bonds, the Icelandic krona and the New Zealand dollar in the first half of 2006. Proving just how volatile a global-macro strategy can be, the older generation of household names also had its wobbles over the years. Both Mr. Robertson (who made a fortune during the Southeast Asian currency crises in 1997) and Mr. Soros (who earned more than $1 billion betting that the British pound was set for a steep fall in 1992) stumbled in the late 1990s during the rise of technology stocks. Write to Alistair MacDonald at alistair.macdonald@wsj.com1 and Margot Patrick at margot.patrick@dowjones.com2