While many investors were discussing the end of the financial world as we know it, business as usual proceeded in the world of macro and managed futures. As these funds take long or short positions in “macro” markets, such as interest rates, stock market indexes, and physical commodities, and trade on the futures markets, which offer liquidity, real-time pricing and reduced levels of counterparty risk, most of these funds continued to offer liquidity to their investors throughout the crisis. However, despite positive returns in 2008, many managed futures funds had lower assets under management (AUM) at the end of 2008 than at the beginning. Why? Because investors sought liquidity in one of the few places where cash was readily accessible. Redeeming interests in these funds between the fall 2008 and the spring 2009 offered opportunities to pick up other assets at fire-sale prices.
Over the three-year period ended December 2009, managed futures funds had positive returns of 17.2%, while macro funds profited by nearly 25%. This wasn’t a fluke, as macro and managed futures funds historically have provided safe harbor during stormy markets. Consider the 51 months between January 1994 and March 2013 in which the S&P 500 index posted losses of greater than 2%. During these crisis months in the U.S. equity markets, stocks declined an average of 5.5% per month, while macro funds returned -0.2% and managed futures profited by 1.2%. In the 74 months when stocks boomed by greater than 3% per month, macro funds averaged returns of 1.7% and managed futures earned 0.7% per month.
How can these funds profit during times of crisis? Discretionary macro funds are managed by investors who specialize in making top-down calls that profit during times of crisis. Macro managers search for trades with skewed risk-reward situations. The most extreme example is that of a fixed-rate currency: Being short the currency may cost a few percent per year in negative carry, but profit as much as 50% in weeks when the currency becomes unpegged. After the quant meltdown in 2007 and the Bear Stearns “incident” in 2008, many macro managers correctly surmised that more downside risk was coming.
Many commodity trading advisors (CTAs) have systematic trend-following at the core of their strategies. It’s easy to see how a trend-following strategy could produce profits that averaged more than 10% from September to December 2008, a time when stocks fell more than 30%. With well-established trends in place, most CTAs had short positions in “risk on” assets, such as commodities and equities, and long positions in “risk off” assets, such as sovereign debt and the U.S. dollar.