Category Archives: Hedge Funds

OZM Och-Ziff Capital Management Down First Two Days Of Trading

The title says it all. We are half way through the second day of trading for OZM the IPO of Och-Ziff Capital Management. Och-Ziff is a large hedge fund company that decided to cash out to the public. Following FIG and BX OZM has sold off as well and is currently below its offering price. Only time will tell how hedge funds work out as a stock market investment but for now they have been bad.

Our guess is just like any industry the good ones will thrive over time and bad ones will not but the timing on going public couldn’t have been much worse. Everything has gone down lately so going public in the middle of all the turmoil didn’t help it out much. Several other fund companies have indicated interest in going public so only time will tell. One interesting thing is that we have not heard about any of the “legendary managers” wanting to go public. Bruce Kovner, Paul Tudor Jones, Stanley Druckenmiller, George Soros, and Nick Roditi. No doubt the thought has crossed their mind but we haven’t seen anything in the press showing interest.

-Trade Macro-

Goldman Sachs Raises $4.5 Billion For Two New Hedge Funds

The title says a lot. Goldman just raised $4.5 billion for two new hedge funds. Guess what the funds strategy is? Credit and Distressed Debt. What does this tell us? To me it means that Goldman sees how bad the credit markets really are and see a way to profit from it. So if you have been following the current mess (and honestly if you are reading this then you are) this is a good indication that it is far from over.

In other Goldie Hedge Fund news they are still down in their two biggest funds Global Alpha a quant fund and Global Equity Opportunies a equity macro type fund.

-Trade Macro-

Morgan Stanley Buys >20% of Barton Biggs Traxis Partners

Morgan Stanley has purchased a less than 20% stake in Traxis Partners. The Macro hedge fund started by Barton Biggs. This follows Morgan Stanley purchases of Avenue Capital, Front Point Partners, and Lansdowne partners in the past year. They are trying to buy their way into the hedge fund space and so far it is working all right.

This purchase was near and dear to Morgan because Biggs used to be the chief market strategist at Morgan before claiming that Hedge Funds were in a bubble and then leaving to start one. Traxis has about $1.5 billion under management and has done decent since inception. A few years ago Barton Biggs also wrote the book Hedge Hogging.

-Trade Macro-

Iluka Up 10% On Ospraie Purchase

Ospraie Management the macro fund ran by Tiger Alumni Dwight Anderson purchased 12% of the Australian mineral sands miner Iluka. Wednesday on news of the purchase the stock was up 10% in the Australian market.

Ospraie Management is one of the premier Macro Commodity funds out there. They invest in many things but focus primarily on hard assets and companies that deal in hard assets such as metals, oil, etc. They have reportedly returned about 22% anually since inception with this year being one of their few underpreforming years.

-Trade Macro-

Some of the Advantages of Multiple Strategies

Many individual traders whether they are institutional or retail focus and specialize in one strategy in one market. While that is fine for part of your money if done right there are many advantages to running multiple strategies inside of your portfolio. Among them are a more consistent steady stream of returns, lower drawdowns, and the ability to perform in all market environments.

How do you achieve all of this? Well you have to go out and find successful strategies. You then have to check their correlation to each other. Depending upon the size of your portfolio you can definitely have overlap but the overall goal is to have several uncorrelated strategies. You want managers in different areas trading different ways. One manger that is involved with growth stocks, one in value stocks, another that is a trend following CTA (commodity trading advisor), another that does statistical arbitrage, a bond manager, an emerging markets manager, etc. You get the idea. As I said earlier some overlap is fine. In fact if you have large portfolio it is good to have a bit of overlap. If you can get multiple growth stock managers that trade slightly differently you will have added a bit more diversification to your returns albeit usually only a small amount. It also makes it so if one starts to under-perform you aren’t as dependent on them to extract the strategies alpha.

This obviously isn’t everything there is to generating good returns in good and bad times but is an often overlooked part of the puzzle. I can’t begin to count the times that I have talked to someone who was diversified into 10 different mutual funds by a financial advisor only to find they were barely diversified at all. Look to different strategies in different markets or to managers that trade in different markets and strategies and you will see that your returns become steadier and usually go up over time.

-The Macro Trader

P.S. In case you didn’t know most managers that trade in multiple strategies across multiple markets are Global Macro Funds or Multi Strategy Funds.

Real Diversification Part-1

It is said that diversification is the only free lunch in regards to investments.  While that may very well be the case, done the traditional way it is one of many ways to not be able to pay for your next lunch.

 If you go to most financial planners or stockbrokers they will tell you things like be 60% in stocks and 40% in bonds.  Or maybe X% in Large Caps, X% in Small Caps, X% in Treasuries, and X% in Corporate.  Sounds great right?  Along with this “diversified portfolio” you get the whole pitch that some of these will zig while the others zag so being in these separate asset classes smoothes out your returns so that you never have a drastic loss.

 Do you see a problem with any of this so far?  The problem is not that diversification can be a wonderful tool.  The problem is that just because you are in a bunch of different funds you aren’t necessarily diversified.  Take the above example: two classes of stocks and two classes of bonds.  If you actually look at what drives those asset classes you will find that over time you don’t really have four positions you have two.  Interest rates drive bond returns for the most part regardless of if they are corporates or treasuries.  What drives stocks?  Interest rates and corporate earnings.   

 I already hear some of you saying “well in the last crash Large Caps went down while Small Caps went up.”  Yes, this time that is what happened but over the long haul this doesn’t hold up.  In fact since 1995 the returns between the SP500 and SP600 had an 80% correlation.  And while the SP600 has definitely outperformed guess when it got hardest hit……..yep 1998, 2002, and summer of 2006 the same times as the SP500.  So when you needed it most the diversification fell apart.

 So how do you properly diversify?  Invest in multiple strategies in multiple asset classes.  For instance instead of just domestic stocks and bonds you could add commodities (energy, metals, agriculture, etc.), global stocks (both developed and emerging markets), global bonds (again developed and emerging markets), and real estate (same thing developed and emerging markets), hedge funds, private equity, venture capital, currency trading, and possibly even collectibles like art.  Obviously some of these have minimum net-worth requirements but the point is to invest in as many disparate and risky asset classes that you can. 

 Why diversify so much?  Because that is the only way to achieve true diversification in a portfolio.  Stocks zig a little differently from bonds which zag differently from commodities which zig differently from global stocks etc. 

 Obviously this is not all there is to it but it is a lot better then the traditional 60/40 stock bond mix.  In Part Two we will discuss how to decide what types of strategies to look for.  And in Part Three we will discuss different ways to decide how to weight your investments in each asset class.

 Happy Trading,

The Macro Trader

Who Profits When Bubbles Pop?

Many fund managers have been saying that we are in another bubble, but this time it is different. Not in the sense that “It won’t happen this time,” but in the sense that it is a global bubble and that almost every asset class is taking part in the bubble.

Jeremy Grantham recently popularized this concept with his paper
It’s Everywhere, In Everything: The First Truly Global Bubble

There are several articles worth of information and opinions here but my question today is: If there really is an all asset class bubble, who will be able to profit from it? Probably not your mutual fund manager since he is most likely long only and 98% invested, probably not your bond fund manager since he is also most likely held to the same long only and mostly invested constraints, probably not your private equity fund since money would dry up and we would be in a slow if not retracting economy, etc. Basically the majority of fund managers out there not only won’t profit from it but because of their investment constraints they will most likely lose a lot of money from it.

So who is left to profit from popping bubbles?  Funds that have a flexible mandate.  Obviously we feel that Global Macro Funds should benefit the most from this type of scenario.  Other types of trading that should benefit would be CTA’s, good Short Sellers, and funds that for the most part are long volatility.

Happy Trading,

The Macro Trader

P.S. download and read the Grantham paper. Even if you disagree with what he says it will make you think.

What is Global Macro Trading?

Global Macro Trading is different from other trading strategies such as long equities, fixed income arbitrage, or other strategies. Instead of being put in a style box Global Macro Trading is characterized as being able to go anywhere in the world, trading any instrument, using any strategy. Basically the objective of a Global Macro Trader is to find the absolute best risk/reward situations on the planet earth.

Many of the best traders of our time are Global Macro Traders. Probably the most well-known Global Macro Trader is George Soros. In 1970 he started the Quantum Fund with Jim Rogers and since then he has averaged around 30% a year building up his net worth to the tune of about eight billion dollars. Other well known Global Macro Traders are Paul Tudor Jones, Bruce Kovner, Michael Steinhardt, Julian Robertson, Stanley Druckenmiller, Nick Roditi, and Louis Bacon. What do all of these traders have in common apart from their basic trading styles? They have all done exceptionally well running multi-billion dollar funds. Everyone that I have named have averaged over 20% a year for fifteen plus years. It’s safe to say that they are some of the best traders ever.

Why do so many great traders gravitate to this style of trading? As noted above Global Macro Traders go anywhere and everywhere looking for great risk-adjusted rewards. Look at the chart below. It is a chart of $10,000 invested in the Barclay Group’s Global Macro Index with the SP500 returns overlaid from 1997 to now.

Global Macro Index 2

What stands out the most from this chart isn’t just that the Macro Trading Index beat the SP500 by over 50%. What stands out the most is that the SP500 had a 47% drawdown and the Macro Trading Index only had a 2.81% drawdown during the same time.

What does this say to me? It says that being tied to one asset class, in one country, to one strategy is very limiting and can be very painful to your portfolio as well. With Global Macro you are able to go anywhere for the best risk/reward situations available.

Happy Trading,

The Macro Trader