Global macro strategies as a group have historically done well during periods of market crises. In each of the three largest peak-to-trough drawdowns of the S&P 500 since 1998, macro was the best or second best performing sub-strategy of the HFRI Index. Macro was one of the few hedge fund strategies to have delivered positive returns during both the credit crisis and the tech bubble burst. As a consequence, many investors have sought exposure to global macro as a way to diversify equity market risks. The strategy has largely met those expectations in recent times. During this year’s drawdown in the S&P 500 from May to September, global macro funds as measured by the HFRI Macro Index outperformed the major equity markets, as well as most other sub-strategies of the HFRI Index.

On an absolute basis, however, the return of the HFRI Macro Index this year has been unremarkable, at -1.9% through September. It is clear that the strategy has faced its own set of difficulties, despite a global environment that appears well-suited for macroeconomic investing. The opportunities offered by Europe’s problems, increased government participation in markets, and widely varying expectations for global growth and inflation have been embraced by most macro managers. The main headwinds to the strategy have been in the form of market whipsaws, difficult-to-forecast political developments and external shocks. While these headwinds may continue to persist, we believe that the broader environment will be conducive to the strategy over the medium-term.

Performance in times of stress
From a historical perspective, the stronger relative performance of macro during periods of market stress has been a defining characteristic of the strategy (see Fig.1). Global macro managers have shown the ability, through their flexible style, liquid portfolio holdings and top-down approach, to preserve capital through periods of deep and significant dislocations, thereby providing investors not only highly attractive standalone risk/return characteristics but also a strong portfolio diversification effect. During the credit crisis, the S&P 500 experienced a peak-to-trough drawdown of 51% while global macro strategies as proxied by the HFRI Macro Index returned +4.7%. When the tech bubble burst from September 2000 to September 2002, the S&P 500 fell 44.7%, but global macro strategies gained 15.5%.