Macro Strategies Shine

Jina Yoon | Chief Alternative Investment Strategist

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Additional content provided by Michael McClain, AVP, Research

The diversification and return benefits of Macro-related alternative investment strategies — both Global Macro and Managed Futures implementation — have been on full display this year with the HFRX Macro and HFRX Systematic Macro Index gaining 5.9% and 9.6% respectively year to date. These strategies are often overlooked during beta-driven market rallies, where investors place less of a focus on diversification and are content with participating in the upward price action of concentrated benchmarks. However, when long-only traditional markets reach inflection points or experience major reversals, Macro’s value add is truly appreciated given the breadth of markets traded and their ability to invest long and short. The HFRX Equity Hedge Index measures the performance of the hedge fund market. Equity hedge strategies maintain positions both long and short in primarily equity and equity derivative securities.

Historical Index Return Comparisons 

Bar graph of the HFRX Macro compared to the Bloomberg U.S. Aggregate Index and S&P 500 for one, three, and five years and year to date, as noted above.

Source: LPL Research, HFR 04/29/24 

Global Macro

For background, Global Macro funds apply a top-down, macroeconomic view of the world to formulate their investment opinions. These managers hope to profit from perceived global imbalances or mispricing and carefully allocate to trades where the observed risk-return profile is skewed in the fund’s favor. Of late, with inflation figures remaining stickier than expected and Federal Reserve (Fed) rate cuts continuously being pushed out, Global Macro strategies have been able to tactically shift their portfolios based on developing market dynamics.  

In addition to shifts in Fed policy expectations, the Bank of Japan (BOJ) first ended its yield curve control policy in March and more recently intervened in currency markets to stem ongoing yen weakness (the yen briefly fell to its lowest level since 1990 this week). We expect these types of macro events and an increased risk of policy errors to provide ongoing opportunities for skilled managers in this space. Global Macro strategies also have a sizable piece of their capital invested in short-term debt securities, with the remainder held as futures margins. With interest rates potentially staying higher for longer, these strategies will collect that short-term income component plus the active futures investment overlay. 

Managed Futures

Systematically designed Managed Futures strategies typically use historical price data as model inputs, and while they may not have the proactive and tactical characteristics of Global Macro strategies, the sheer breadth of markets traded, and empirical benefits of trend-following are valuable attributes for investors. The average Managed Futures strategy invests in well over fifty distinct futures contracts across equity, bond, commodity, and currency markets. Year to date, the industry has capitalized on sustained price trends in all four markets. Often, such large directional moves — either up or down — are confined to one asset class, making the 2024 trends across asset classes even more attractive from a total return and diversification perspective. 

Niche markets such as cocoa within the commodity complex have also seen incredible price action this year and exemplify not only how the average investor can profit from the diverse exposure inherent in Managed Futures but also how investors should expect underlying exposures to shift. Most Managed Futures funds began 2024 with and subsequently added to their long cocoa exposure, thus profiting from prices moving higher amid supply shortages due to drought (though these managers consider price action only). While these gains were valuable additions to all models, the cocoa market experienced one of its steepest one-day declines on record earlier this week. This reversal has already negatively impacted existing long positioning; however, if prices continue to trend lower, we expect strategies to first actively reduce that long exposure and eventually take a short position.  

Year-to-Date Price Changes for Cocoa

Line graph of the price change of cocoa from January 1, 2024 to April 30, 2024 as described in the preceding paragraph.

Source: LPL Research, FactSet 04/30/24
Disclosures: Any commodity futures referenced are being presented as a proxy, not as a recommendation.

Summary and Current Positioning 

Going forward, we believe Global Macro and Managed Futures strategies will provide attractive diversification and support portfolios during periods of heightened volatility. From a tactical perspective, we are monitoring any long equity exposure on a look-through basis as this type of positioning reduces overall diversification benefits and can lead to short-term weakness in the event of a swift sell-off. However, as these strategies can quickly adapt to shifting market dynamics and trade on such an extensive list of investments, these risks are mitigated. Other top positions this year in these asset classes have been long U.S. dollar, long oil, and short fixed income exposure.

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Jina Yoon

Jina Yoon is LPL Financial’s Chief Alternative Investment Strategist. Her investment career includes over 15 years of experience.