As advisors become more sophisticated applying non-correlated hedge fund strategies, those who adopt a core-satellite portfolio approach to their absolute return allocations are demonstrating increased interest in, and allocations to, single-strategy hedge fund satellite investments to complement their multi-strategy (fund-of-funds) core holding. Managed futures programs offered by commodity trading advisors (CTAs) and the broad investment mandate of global macro (GM) managers are strategies that advisors are turning to with increasing frequency.
Many advisors have been using the well-documented investment prowess of managed futures titans such as Campbell & Co., John Henry, and Graham Capital for many years. More recently, allocators have discovered that GM managers offer the opportunity to exploit the same source of return as CTAs (i.e., pricing trends) with less volatility and greater performance consistency.
CTA and GM managers both seek to invest in longer-term secular shifts in capital flows, identifying trends in major equity, debt, commodity, and foreign exchange markets, but they participate in distinct ways. CTAs, are generally momentum (technically driven) traders while their GM counterparts focus on such fundamentals as value and relative value.
This disparity in approach helps explain the disparity of returns and volatility. Systematic trend-following CTAs rely on technical tools to determine entry and exit points, generally without regard to contradictory fundamentals. CTAs tend to follow their systematic models regardless. On the other hand, macro managers tend to stand aside when market fundamentals don't appear to be properly explaining a trend.
Many industry observers believe that macro managers have an edge in the timing of their trades in that they may often respond to changing fundamentals and initiate positions before a trend emerges.
In a recent AIMA Journal article, Ramon Koss, head of alternatives at Credit Suisse, observes that there is often an overlap between CTAs and GMs in the middle of a well-established trend, "but the timing is different. Macro traders get in earlier because they can be anticipatory, whereas CTAs are reactive. For the same reason, macro managers sometimes get out before a market turns. CTAs generally will wait for confirmation that a trend is over before exiting."
Investors may be awakening to the implied difference in risk profile and volatility that distinguishes CTAs from GMs. In the most recent quarterly asset-flow study from hedge fund researcher TASS, GM only trailed long/short equity and event driven in new investments; they were also the most popular strategies in 2003. Tremont Capital Management CEO Robert Schulman indicated strategies such as GM now make up a greater percentage of industry assets because these managers can typically deploy large amounts of assets. "Asset inflows favored strategies with broad investment latitude," said Schulman. "The rapid growth of the industry over the past few quarters has led to a shortage of managers in certain styles?? 1/2 thus leading to continued growth in strategies with less capacity constraints."
As global macro's share of hedge fund assets increases, so does demand for GM's top managers. GM heavyweights such as Moore Capital and Soros Fund Management are now eclipsed in size by newer stars such as Caxton Associates and Madrid-based Vega Asset Management, which recently became Europe's largest hedge fund firm.
Next month, we will more closely examine the performance, correlation, and volatility of these strategies.--Jeff Joseph
Jeff Joseph is managing director of Rydex Capital Partners and serves on the advisory board of HedgeWorld (www.hedgeworld.com), a global provider of hedge fund information and investment products.
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