1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Robert Abbott
Robert Abbott
Articles (176)  | Author's Website |

Louis Moore Bacon: Macro Turns Into Mediocre

Bacon was a benchmark-beating guru in the previous decade, but changing asset correlations and lower volatility in this decade have left him behind

Hedge fund manager Louis Moore Bacon (Trades, Portfolio) and his Moore Capital Management have not been able to keep up with their own legends. During his first year of operation, Bacon brought in a return that topped 85%; in recent years, he has struggled to just stay above the zero line.

Intriguingly, Bacon is part of a generation of hedge fund managers who are seeing their results shrink, while a new generation, many trained by the older generation, are making the most of macro investing strategies.

Who is Bacon?

The hedge fund guru was born in 1956. He received a Bachelor of Arts in American literature from Middlebury College and an MBA in finance from Columbia University.

He went on to work at Bankers Trust and Walter N. Frank & Co; at the latter he traded currencies. That was followed by stints at the New York Cotton Exchange and as a trader of financial futures at Shearson Lehman Brothers. Bacon rose to become senior vice president of futures trading at Shearson.

Bacon started his own firm, Remington Trading Partners, in 1987, distinguishing himself by profiting during the market crash and its recovery. Two years later, he was on the move again, starting another company: Moore Capital Management LLC.

Politically, Bacon has been active in recent years. He was a fundraiser for Mitt Romney (2011), donated to the British Conservative Party (2010) and made a $1 million donation to Jeb Bush's 2015 presidential bid. Investopedia reported in 2016 that Bacon had contributed to three Democrats and two Republicans.

As a philanthropist, Bacon has made significant contributions to environmental causes and  created his own environmental protection foundation in 1992.

Bacon’s global interests show up relatively early, with his exposure to currency and futures trading. He also had trading and management experience before starting his own firms.

What is Moore Capital Management?

Moore Capital Management, based in New York City (a Delaware limited partnership), provides investment management services to U.S. and non-U.S. investment funds sponsored by Moore Group.

According to its Form ADV Part 2A, it serves high-net-worth individuals, various trusts, pooled funds and other institutional investors, through a group of private funds.

In its Form ADV, the firm reports additional offices in London and Hong Kong, with a total of 427 employees. As of March 31, the firm reports having $53.82 billion of assets under management (media reports often put his holdings in the mid-teens).

While Bacon is considered one of the greats among hedge fund managers, his firm’s history has had its rough spots. Fortune magazine reported in 2012 that he had just had two losing years in a row, key trading employees had left the firm to start their own hedge funds, and in 2010 the firm had been fined $25 million for failing to supervise a trader who tried to manipulate the metals market (the firm neither admitted nor denied liability). And those are just a few of the problems Bacon and firm have dealt with.

Moore Capital Management is a very large hedge fund player, serving primarily institutional investors and high-net-worth individuals. The firm serves these clients through private funds.

Strategy

Moore lays out its three key investment strategies in the Form ADV Part 2A.

  • Global Macro Strategy: Involves long and short investments across global markets. That includes foreign exchange, government and corporate debt, interest rate instruments, equities, indices, metals and commodities through spot markets that involve forward, futures, options and swap markets. Within this context, they have developed fixed-income, emerging market, private equity and distressed securities products.
  • Macro Managers Strategy: It is unclear how this differs from the Global Macro Strategy, based on information available in the Form ADV Part 2A.
  • Emerging Markets Strategy: Aims to invest in markets of developing countries that have become open to outside investors in recent past, at least those with potential for "substantial economic growth."

Reuters provides this brief definition of macro strategy: “Macro funds bet on macroeconomic trends using currencies, bonds, rates and stock futures.”

The firm also outlines its investment process in the Form ADV Part 2A. That involves fundamental research on:

  • Economic.
  • Financial.
  • Political events.
  • Other external factors.

They also use price and market analysis, and individual circumstances dictate whether the fundamental analysis, price or market analysis prevails. Generally, though, fundamental analysis will be the primary form of analysis.

Bacon’s basic strategy, however, has been in trouble. FINalternatives, which follows hedge funds and private capital, reported in July, “Macro funds have struggled in recent years as asset correlations have risen and volatility has fallen to record lows, with Hedge Fund Research’s HFRI Macro (Total) Index gaining only 3.43% for the three years through June 30, the least among major strategies.”

It goes on to note Moore’s flagship fund lost some 2% in the first six months, after just a 5% gain in 2016.

In April of this year, Reuters reported a macro revival, but mostly among new firms with managers who started out at hedge funds such as Moore, Brevan Howard and Tudor Investment Corp.

The financial world may or may not be turning its back on macro strategies, which Bacon and Moore Capital helped create, but something seems to be changing. The strategies that once delivered outsized returns have been clipped by rising asset correlations and falling volatility. Still, we cannot rule out a return to volatility as the stock market continues to ride an aging bull that faces several political and economic challenges.

Holdings

Technology plays the biggest role among the sectoral holdings in his largest fund:

Louis Moore Bacon sectors

GuruFocus lists the following as Bacon’s top 10 holdings as of June 30:

Given the fund has three of the FAANG stocks, which have done well in recent years, along with other strong technology players such as Alibaba, it appears Bacon has done some heavy hedging. That might explain why strong stock picking, as shown in this list, has produced underperformance. Others who have suffered from this strategy include John Hussman (Trades, Portfolio) and, until about a year ago, Prem Watsa (Trades, Portfolio).

Performance

Although the guru is notoriously private and tight-lipped, we can make some surmises about the overall performance of Moore Capital. First, he started very successfully, powering through not only the late 1980s, but also the dot-com boom and bust.

Investopedia reports Bacon successfully predicted the fallout from major geopolitical events, including the 1991 invasion of Iraq and the collapse of the Japanese stock market. He also was correctly positioned just before the United Kingdom’s 1992 currency crisis. In his first year, he amazed the financial community with a return of more than 85%.

Recent years have been tougher. Reuters explains, “Macro funds bet on macroeconomic trends using currencies, bonds, rates and stock futures. They outperformed the broader industry during the financial crisis and amassed tens of billions of dollars between 2010 and 2012. But they lost most of those assets between 2013 and 2014 and also in 2016 for a variety of reasons, including performance.”

For Moore Capital specifically, an article in the New York Post cites HSBC data in reporting a 2% loss in the first half of this year (compared to an average gain of 3.7% for hedge funds as a group, and an 8% gain for the S&P 500). Results have been dismal enough for Moore to have cut its management fee from 3% to 2.5% in 2016, and to lay off 7% of its 427 employees.

There is an old investing adage that strategies must change or adapt to changing circumstances, whether those changes are company-specific or broadly geopolitical. It appears Bacon misread the tea leaves early in this decade.

Conclusion

Bacon and his Moore Capital Management certainly had a good run in the years leading up to recovery from 2008. But for most of the past decade, he has lost ground. No doubt his positioning will serve him well when the next correction hits, but many of us have waited some time now for a correction that stubbornly resists showing its face.

For investors, even those who can afford it, macro investing is best left to the big hedge funds. Some of the brightest minds have been brought down by the sheer number of variables that can affect the political and economic worlds. Focusing on individual companies does introduce many variables, but trying to focus on opportunities in a constantly shifting world generates far too many variables for most investors.

Disclosure: I do not own shares in any of the companies listed in this article, and I do not expect to purchase any in the next 72 hours.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995, and in 2010 added options, mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the Unseen Revolution. In Big Macs & Our Pensions: Who Gets McDonald's Profits?, he looks at the ownership of McDonald’s and what that means for middle class retirement income.

In an eclectic career, Robert Abbott was a radio news writer and announcer, a newsletter writer and publisher, a farmer, a telephone operator, and a construction worker. When not working, he has been a busy volunteer, which includes more than a decade of leadership roles at the Airdrie Festival of Lights, one of North America’s leading holiday light displays. He lives in Airdrie, Alberta, Canada.

Visit Robert Abbott's Website


Rating: 5.0/5 (1 vote)

Voters:

Comments

Thomas Macpherson
Thomas Macpherson premium member - 5 days ago

Another great article Bob. What's interesting in looking at Mr. Bacon's top holdings is that you might want to simply consider holding a blend of an S&P500 Index fund and QQQs. It would be a helluva lot cheaper and have a great deal of overlap with his portfolio. One question: do you think his holding of so many large caps is a reflection of his view on their valuation or simply dictated by the size of his AUM? Great stuff as always Bob. Best. - Tom

Robert Abbott
Robert Abbott premium member - 5 days ago

Hi Tom - thanks for reading and commenting!

Regarding an S&P index plus the QQQs, I personally would be hesitant. In 1999, I bought something similar which was a good idea until the dot-com crash. My fund included a heavy weighting in Nortel, and I paid the price. However, that package might appeal after a correction (I'm still bearish, particularly as I watch the machinations in the tax reform process).

On your valuation question, I haven't checked the P/Es or other metrics of Bacon's top 10 stocks, but I would imagine they all have fairly hefty valuations. I think you're right about having to go for large caps because of the mountains of cash he needs to put to work. Bob

Please leave your comment:


Performances of the stocks mentioned by Robert Abbott


User Generated Screeners


jlhpersonalJason's Greenblatt - Updated L
dosowsky1Fast Revenue Growth
Kbannon77All Stocks US
Kbannon77All Stocks
opadovaniP median2
carter2u2Small Cap No Debt
blake.howellvjj
bkw82Predictable/ebitda 10/52 week
pbarker46Hist. High Yield
opadovaniROA_DIV2
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat

{{numOfNotice}}
FEEDBACK