Global macro funds suffer in unpredictable markets

Uncertainty over global economic recovery and its feed through to companies has created divided opinion on the global macro sector

Fund managers have mixed views about the speed of global economic recovery and opportunities in the global macro hedge fund sector.

Ian McVeigh, a partner at Parkway Capital, believes now is a fortuitous time for the sector. Parkway Capital is awaiting Financial Services Authority (FSA) approval before it launches its global macro portfolio, the Parkway Global Fund.

A lot of capital has been withdrawn from global macro recently as proprietary desks at investment banks and insurance companies have cut back investments following 11 September and a lot of the big macro funds are not as dominant as they once were, according to McVeigh. In contrast, a lot of money has gone into long/short equity funds, crowding the market.

However, McVeigh believes long-term global market conditions will continue to favour global macro hedge funds.

'We believe the phenomenal bull market in equities is over,' he says. 'Being simply long of equities does not feel like a winning strategy to us. You need to be more flexible and diverse. If you look at equity markets, a lot of them are playing pretty similar games right now.'

The only negative for global macro and hedge funds in general will be if equities start 'rocketing up,' he adds.

According to GAM's chief investment officer, multi-manager, David Smith, global economic recovery will be 'weaker than expected and possibly front loaded.'

Equity markets would have fallen far more in response to the deteriorating economic climate had it not been for the Fed's interest rate cuts following 11 September, which kept US consumption up and averted financial crisis, Smith says. But the long-term effects are still to be felt.

In the absence of a catalyst to move the market ahead, GAM expects to see a sideways moving market at least until the end of the year when investors may become frustrated or there may be a surprise recovery.

The biggest threat to global markets is 'event risk,' according to Smith. 'The political situation around the globe remains tense and it would not require much to frighten the consumer and hence the markets,' he notes in a market overview for his portfolio GAM Diversity.

Consumer sentiment and consumption are the keys to an improving global market and if either diminishes it could slow recovery.

The market drivers have come from Asia and the emerging markets, Smith says. The European and US markets have been unstable with the managers of capital trying to make sense of conflicting news from the corporate sector at the earnings level versus increasingly positive aspects of much of the macroeconomic data.

Economic recovery will feed through to equity and bond markets eventually, according to GAM, but the speed of that feed is in doubt.

'We believe the markets may be vulnerable to disappointment, particularly in the short-term, as the level of anticipated recovery is high, particularly on a regional basis.

'We think this is especially true in the US and Europe, where we expect recovery to come through either late in 2002 or even into 2003.'

There will be continuing equity sector rotation as investors try to make sense of often conflicting macro and corporate earnings news, adds the report. This could create opportunities for equity long/short managers if trends and themes develop.

David Tucker, president of DFD Select group, which runs the DFD Swan Fund of Funds, believes the current markets are difficult for global macro hedge funds because they are unpredictable.

Global macro hedge funds are not correlated to the market so all they require is a trend, he says. Whether the trend is up or down they can make money by going long or short.

'They only lose money if the market is choppy,' says Tucker. 'Are we in choppy weather? The answer is unequivocally yes.'