Macro hedge fund strategies have had a good summer amid broadening market volatility and intensifying global economic uncertainty. August has been especially good for macro strategists.
Not every macro fund has done well in recent months, however. In fact, Bridgewater Associates, the largest hedge fund in the world with $160 billion in assets under management, has lagged its peers across virtually all of its macro strategies.
An August rush for macros
Macro hedge funds ought to thrive in times of uncertainty and volatility, but this did not shine through in 2018, with macro funds ultimately lagging a basket of major hedge fund strategies for the year. Macro strategies underperformed compared to other other hedge funds in both 2016 and 2017.
Further weakness in the first seven months of 2019 has led to an exodus of capital: After bringing in $14 billion in net allocations over the past several years, allocations to macro hedge funds has dropped by nearly $13 billion through July.
Overall, macro hedge funds -- as a group -- seemed to be failing to deliver on a core premise of their strategies: finding alpha in times of economic and financial uncertainty. Yet, when the yield curve inverted last month, volatility and recession fears exploded across global markets. At last, it seems that macro strategies may be put to the test in a real way.
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With macro funds showing bumper returns in August as a group, it seems macro strategies may finally be on the cusp of a fresh moment in the sun. Strangely, however, Bridgewater has been having trouble finding its feet.
From leader to laggard
At the start of the year, Bridgewater and Ray Dalio (Trades, Portfolio) were riding high. In 2018, the flagship Pure Alpha Fund posted an impressive 14.6% return net of fees, far better than the S&P 500’s 7% loss and slightly better than its own multi-decade 12% average return. As we commented back in February, it seemed as if Bridgewater was getting its mojo back even as other hedge funds faltered:
“Bridgewater’s Pure Alpha Fund delivered the goods in 2018. Its bet on a global slowdown appears to have been a factor in that story, especially toward the end of the year.”
Alas, our prior assessment has not proven itself out thus far in 2019. Indeed, Bridgewater has found itself lagging the market through last month. As of Aug. 23, the Pure Alpha fund had lost 6% since the start of the year, while its levered variant, Pure Alpha II, was down a painful 9%. Bridgewater’s Pure Alpha Major Markets Fund, which offers exposure to the major markets subset of the Pure Alpha strategy, has fared worst of all; the $16 billion fund posted an 18% loss through Aug. 23 -- a far cry from the 12.5% annual return it has averaged since 1991.
Compared to the 4.7% gains enjoyed by other macro funds through July, Bridgewater’s performance is downright dismal. The principal cause of the fund's woes was its bearish play on interest rates, which has not played out as anticipated thanks to unexpectedly vigorous intervention on the part of the Federal Reserve.
Verdict
While other macro funds are enjoying a moment in the sun as the sector’s undisputed leader lags behind, Bridgewater is still an important player to watch. Investors should be thinking defensively right now.
Disclosure: No positions.
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