The failure of fancy strategies

While one can fret about the relative performance of equity and fixed-income funds, the frustration with those that have underperformed is directed at their evident style bias. The same cannot be said for global macro or trend-following strategies, with many showing absolute losses, yet little clarity on why these continue to struggle.  

A few have recently clawed their way into positive territory, often due to a sharp, short period of performance rather than the idiosyncratic returns most would like to see from the lens of those outside traditional asset classes. Excess returns in declining markets is a needle in a haystack. Even other criteria hit the wall, the volatility (measured by standard deviation) is often much higher than expected at 7-15%.

The grandaddy of global macro is Standard Life (now Aberdeen Standard Life) Global Absolute Return Strategies (GARS) Fund, which was designed with an insurance company in mind. Across the Atlantic, GMO was the go-to talking head of macro strategies. Absolute and relative valuation across equities, interest rates, currency, credit, inflation, commodities and volatility were condensed into 25-40 positions. For years that clipped the ticket, and even though there have been changes in the teams, in practice it has remained the same process. The trouble is that the past ten years has shown lower upside and the impact of troughs that were absent in the prior decades.

To add to the intrigue, others either emulated their process or were founded as new offshoots showed similar performance and failed to reach anything like the steady uncorrelated returns of the past.

Taking a step back, the logic of taking positions in various capital markets to account for systemic valuation or judgmental incongruities is sensible. Why has this therefore gone astray? Fingers point to the impact of central banks, correlations, dispersion and crowded trades. That belies the ex post distinct opportunities that should have cumulated to a positive outcome. The answer might lie in the valuation methodologies. There is a leaning towards value-oriented equities and fixed-income payoffs have been small without a wholehearted embrace of duration.

Trend-following is an exponential version of the same, belittling the complexity of the approach. The excessive number of super-qualified smart individuals seems wasteful for strategies that seek to nuance various forms of momentum using opaque algorithms.  Most advisers would blush at the challenge to explain what they do, never mind the rationale for the monthly or quarterly performance. Sizeable gains are inevitably followed by as spectacular losses. Match that with some of the biggest fees around.

A troubling aspect is the degree of similarity in performance. Occasional king-hit months followed by prolonged periods wandering in the desert.

The inevitable conclusion is that global macro and trend-following is a messy mix of crowded similar methodologies. Occasionally a generous dollop of equity momentum or a flurry in currency or energy markets gives hope that the mojo is back. Regrettably, it is rarely persistent.

Perhaps the redeeming feature is that global macro and trend-following tend to be uncorrelated. But it takes a brave investor to be confident that these strategies are worth the complexity and cost in a new age portfolio. Certainly the promise of decent returns has been missing.

It is now up to the managers of these strategies to provide more than hope and a blame game on market conditions.

Giselle Roux

Giselle Roux is one of Australia's most well-known and highly regarded investment strategists, having held the role of Chief Investment Officer at both Escala Partners and JB Were. She has also held a number of senior equities analyst and investment banking roles including with Citigroup, Bank of America Merrill Lynch and McIntosh Securities. Giselle is a host of Inside Network events, a member of the Advisory Committee and regular contributor to the Inside Adviser and Investor publications.