Despite no snow fall since Mid-December in Chicago, we witnessed a solid eight of nine days straight with the sun nowhere to be found. In its midst, we set off for the Sunshine State to warm Miami, where MFA and Context Summit took place one right after the other.
It seems Florida in February is a great time to have a conference and there was definitely a great show from people from all different parts of the industry. Here are some of the highlights from the likes of Ed Shim of the Teachers’ Retirement System of the State of Illinois, Trent Webster of the Florida State Board of Administration, Brian Hurst of AQR, Adam Duncan of Cambridge, Jonathan Miles of Wilshire, Christopher Solarz or Cliffwater, Herman Laret of Titan Advisors, Jackie Rosner of KKR Prisma, Andrew Bound of Tudor, Nick Granger of Man AHL, and Michael of Harris Campbell.
On Global Macro trading:
- It remains a crowded space, with many more players these days. Macro is no doubt struggling of late, and a result is that macro is under-represented in investor portfolios.
- Macro managers seem to be struggling to deploy risk, even though their “price” in terms of fees, minimums, etc. remains the same. Has institutional investor desire for low volatility forced macro managers to have tight stops, sucking volatility out of programs in turn sucking volatility out of the markets?
- I grew up in Soros days, but there’s no Soros equivalent in Macro anymore. The information edge is gone, not enough to have boots on the ground – everyone can get intel and info from any part of the globe in near real time.
- In macro, has the tail started to wag the dog? As the investor base has shifted to more institutional, it has led to lower vol/lower returns. Is the investor based complaining about below average returns the ones causing the below average returns by their (en masse) desire for lower volatility? And what happens when a high sharpe achieved with low volatility doesn’t meet the investment committees bogey? It can be great on a risk adjusted basis, but if doesn’t meet my target, I’m not interested… I need the higher return. Let me manage the risk, you provide the return driver.
- Macro historically had two success factors: 1. Fundamental edge (like a former Fed governor, weather analysts, etc) and 2. Tactical trading edge (able to jump in and out on employment report days, etc.) But these two factors no longer all the relevant. Seems everyone has a fed gov. on staff these days and access to any/all data/info they need, eating into the fundamental edge; and short term trading and algos have eaten into the tactical edge. Shift has been away from that tactical trading – where were all the macro traders in the hours around Brexit, for example? The new ‘edge’ for macro becoming structural alpha.
- There is a definite trend of macro managers ‘quantifying’ strategies, using quant as inputs for discretionary trading.
On performance/fees/beta/asset flows:
- Clearly managed futures cycles up and down. We’re in a down cycle now.
- Very interesting to see managed futures have inflows in 2016 when performance was down. First time I can remember seeing that. Lower fees surely helped. Typically managed futures sees more performance chasing than other asset classes. But people getting more mature about managed futures. Hopefully will start buying into drawdowns.
- Lots of focus on fees among institutional investors, and not all performance based concerns. Not going to pay up for performance because it is optically and politically unattractive.
- Willing to adjust terms to get fees lower. Will lock up to get better fees, while also asking for hurdle rates and longer crystallizations.
- Put an adjective in front of beta these days, and the fees go up, managers get to charge more fees. Meanwhile, 2/3 of CTA space is offering a watered down, ‘beta’ version of their products, seemingly cannibalizing their full fee business. Will that align incentives for higher returns?
On Trump/ current Market Environment:
- Jury’s out on Trump’s ‘Make America Great Again’, but he could very well ‘Make Discretionary Macro Great Again.’
- We’re all speculating on what this new administration means for market. Trump may provide a new normal with fatter tails, and has pushed the economic surprise index to a decade high. China and Trump – watch out if he picks a fight there. He tweets 3 times more about trade than about other items.
- We used to live in a world with Steve Jobs, Johnny Cash, and Bob Hope… now we have no jobs, no cash, and no hope.
- Trump might have trouble pushing his agenda through, limiting market impact and amount of growth policies can produce.
- The last real shock we had was back in Aug 2015, when saw the Chinese devaluation. In contrast, Brexit and the US election, etc – nothing really changed the next day. Wasn’t a true market shock/crisis.
- One constant seen, the big opportunity set in Discretionary Macro with how this table is set (rising rates, all time highs, Trump, etc) Definitely NOT the case that nothing’s going on. Macro traders should be looking at plenty of opportunities. Divergent monetary policy still out there, global rates still negative, US rising. Add in trade wars, populism – that’s going to reflect in FX markets – pushing one side up/one side down – in a relative value trade.
- There’s more volatility, but it’s in a tighter band because of banks pulling out of markets. The greatest fear is directionless volatility. Repatriation doesn’t make sense without an appreciating US Dollar.
On Managed Futures as Crisis Alpha:
- Investors have to protect the portfolio somehow, and most choices are costly. CTAs are a cheaper way to get exposure to dislocations.
- If you have a 1-month crisis alpha window… Go Home. You’re not going to get what you’re looking for out of managed futures/macro. The short term crisis protection is mainly luck, as to what positions portfolio in. Can be a loser in first days, weeks, months of a crisis if causes reversal of trends.
- Further, managed futures historical profits in a flight to quality in bond markets could be at risk. If bonds sell off, then a crisis, flight to safety trade buying bonds will reverse bond trend and cause short term losses. Not to mention portfolios could be long equities heading into a crisis with the current trend.
- Managed futures can do well during a short bond trend. Have historically done well. Volatility could play out more in FX markets than credit and equities. US Dollar near 14 year highs, helping managed futures/macro traders over stock/bond pickers.
On Investors in Managed Futures/Macro:
- Investors have made a massive shift to diversify and protect portfolios. They’ve made it all back from the 08/09 crisis, now main goal is protecting it. Alts are no longer Alternative in institutional space. Having no alternatives in your portfolio is now the exception, not the rule, these days, with just 18% of instit. Investors allocating to no alt classes.
- Three most frequent question we hear from investors = 1. Why hasn’t it been working/why returns muted? 2. Will it continue to be a diversifier? 3. Fees, fees, fees.
- Most view it as a strategic allocation, versus a tactical one, having a set allocation percentage providing value over long term.
- Prefer to allocate when capital is dear, and withdrawing when capital is cheap – corollary for managed futures, would rather be investing when in drawdown, pulling back at highs. Credit Suisse managed futures index drawdown of -10% has always been a good time to get in.
- Came to MFA a few years ago and heard a lot of sob stories about performance… and ended up allocating $800 million. When there’s blood in the streets. Now is the time to invest in managed futures space. Our first question in a drawdown is… can we add more. If you’re pouring money in when its doing well, and pulling it out when doing poorly…you’re doing it wrong. Invest for a 3 to 5 year cycle, so short term pain makes it hard to shake us out of the allocation.
- We don’t like the space, we like the managers. Due diligence key to success.
On Innovation in Space
- Is the Golden Age of quant/systematic. Investors get algorithms and computerized systems now. Dealing with tech in everyday life now has made investors more accepting/understanding of systematic strategies.
- Best managers spending money on research and adapting to ever changing markets, saw success in esoteric markets like coal and European electricity. Research process not just on strategy, but also opportunity and new markets.
- Lots of work in machine learning, big data, and alternative data sets. Biggest opportunity in big data is mining of non traditional data sets. Already doing machine learning on price and volume data, etc. Using it to better execute, avoid market impact, etc. Quant macro has tons of degrees of freedom, machine learning can help isolate and analyze those.
- Machine learning is same thing we already do – but instead of a human scouring data and patterns to find anomalies and then find out how to capitalize off of them, computers do the work infinitely faster and with more data. But machine leering won’t be replacing humans any time soon, because makes it too hard to defend performance in down cycles. Trend, there were no trends. Macro, didn’t deploy risk at right time. Machine learning program, the machine didn’t do so well… makes it hard to defend/explain to investors.
- Alternative data sets. We’re talking satellite images of retail parking lots, individual crop data, cell phone tracking, radar images of oil storage facilities. Tremendous opportunity for different return drivers out of these alternative data sets. We haven’t extracted any performance out of it yet, but we’re looking at it very seriously.
- Machine learning being talked about a lot at this conference, but it’s been going on for years already. It’s a big deal, I just don’t understand why we’re just now talking about it.