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Global Macro–Why Now?

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Global Macro–Why Now? Global Macro–Why Now? SOLUTIONS & MULTI ASSET | AIP HEDGE FUND TEAM | INVESTMENT INSIGHT | 2018 Global Macro is an investment CO-AUTHORS style that is highly opportunistic and has the potential to generate MARK VAN DER ZWAN, CFA strong risk-adjusted returns in Chief Investment Officer challenging markets. Against a backdrop and Head of AIP Hedge Fund Team of geopolitical uncertainty and potentially increased volatility,1 we felt it would be timely to share our insights on the space and explain ROBERT RAFTER, CFA Head of Discretionary Global why we believe now could be an opportune Macro, Sovereign Fixed time to make an allocation to Global Macro. Income Relative Value and Emerging Markets Strategies Both equity and fixed income markets have exhibited strong performance in recent years, leading to fully valued stock markets, historically low yields and tight credit spreads. However, substantial U.S. fiscal stimulus through a $1.5 trillion tax cut and a $300 billion increase in government spending,2 amid robust economic growth and inflation readings, have made it difficult for investors to adopt a more cautious, late- cycle posture in their portfolios. Importantly, increasing market volatility levels may result from any of a litany of potential catalysts, including escalating protectionist policies, U.S. midterm elections, central bank policy missteps, Italian debt sustainability, tensions in the Middle East, and political unrest in key emerging markets. We believe that these dynamics have 1 Please see Glossary for definitions. 2 Source: AIP Hedge Fund Team. The statements above reflect the opinions and views of Morgan Stanley Investment Management as of the date hereof and not as of any future date and will not be updated or supplemented. All forecasts are speculative, subject to change at any time and may not come to pass due to economic and market conditions. Past performance is not indicative of future results. INVESTMENT INSIGHT set the stage for a challenging investment “discretion” on trade expression and landscape, one in which Global Macro execution lies with a human trader. tends to outperform. Experience and skill inform qualitative inputs that factor into decisions about Time Horizon In this paper we provide an overview trading instruments, sizing and timing. • SHORT TERM – Short-term managers of Global Macro hedge fund strategies, express trades with holding periods evaluate their performance from a • SYSTEMATIC4 – Systematic managers typically less than one week, often historical perspective, and discuss rely on quantitative models to capitalizing on intra-day mispricings. options for implementation. We will also determine entry, exit and sizing These strategies are trading and explain why we believe an allocation decisions. A distinguishing resource intensive, and they can to an actively managed, diversified characteristic of systematic strategies only be implemented in highly portfolio of Global Macro managers is a is their ability to trade across a great liquid markets. valuable component of a well-diversified number of markets and construct well- portfolio—particularly today. diversified portfolios. • LONG TERM – Long-term managers express trades with multi-week to multi-month time horizons. Section 1: Overview Transaction costs are less important Though the definition is fairly open- in long-term strategies than in ended, Global Macro strategies generally Type of Input short-term ones. involve directional positioning across a • FUNDAMENTAL5 – Fundamental Managers can be further differentiated by broad range of markets and asset classes managers evaluate opportunities based the degree of directionality and generalist based on technical and/or fundamental1 on criteria such as valuation metrics, versus specialist orientation. And of analysis. With the ability to take long or economic forecasts, interest rate and course, they may employ a combination short3 positions in any global market using currency outlooks, and fiscal and of strategies and won’t necessarily fall any financial instrument, Global Macro monetary policy. The information neatly into any one classification bucket. strategies can be very opportunistic. employed may be macro-economic or the aggregation of micro-level Global Macro managers can be classified information. These managers tend in a variety of ways, including by style, to be close followers of academia, type of analytical input, and investment particularly econometrics. time horizon. Sources of Return • TECHNICAL6 – Technical managers Global Macro managers seek to generate employ predictive signals that are the majority of their alpha7 by timing generated from market-related their exposure to risk premia3 (“betas”)3 information (e.g., price, volume, order across a broad range of liquid markets. To Style book), and often involve the use of do so, they gather, process and analyze • DISCRETIONARY – Though pattern recognition and other types of data, use proprietary trading models, discretionary managers may employ advanced statistical forecasting tools. customize technology platforms and rely quantitative models, ultimate on automatic execution systems. Some managers also seek to gain an investment edge by applying bottom-up micro-level analyses in specific markets and/or regions. 3 Shorting is selling a security not owned by the seller to take advantage of an anticipated price decline. 4 Please see Glossary for definitions. 5 Please see Glossary for definitions. 6 Please see Glossary for definitions. 7 Please see Glossary for definitions. The statements above reflect the opinions and views of Morgan Stanley Investment Management as of the date hereof and not as of any future date and will not be updated or supplemented. All forecasts are speculative, subject to change at any time and may not come to pass due to economic and market conditions. Past performance is not indicative of future results. 2 MORGAN STANLEY INVESTMENT MANAGEMENT | SOLUTIONS & MULTI ASSET GLOBAL MACRO–WHY NOW? DISPLAY 1 Return Decomposition % Alpa • M • • • S M Valuable Alternative actors • Bett • Value • E • Carry • M Traditional Maret etas • E T Return T • Fix I • Currency • Commodity • G R-Free • Political AlpaActive is Sources R M act S R M act Rte • E namic and omplex • M L Valuable L • T om-up • For illustrative purposes only. Global Macro managers seek to exploit • Differences in local tax and regulatory Section 2: inefficiencies, such as those listed below, structures A Historical Perspective many of which feature prominently today: The beta component of a Global Macro History • Investor behavioral biases manager’s return typically comes from In the 1990s, Global Macro was systematic exposure to a variety of • Reduced consensus opinion on market dominated by a small number of large traditional forms of risk premia, including directionality managers with highly concentrated, equity risk premia, term premia and credit leveraged directional bets, which • Monetary policy errors causing risk premia. An additional component inevitably led to high volatility of disequilibria in the financial markets of returns stems from exposure to returns. However, beginning in 2000, “alternative risk premia”. These often are • Non-economic investment activities with the investor community’s increased well known and commonly exploited (central bank currency interventions, demand for institutionalized hedge fund phenomena that can be captured through sovereign debt rating downgrades, managers, assets flowed to those Global simple trading strategies. political events) Macro managers that adopted a more • Divergent global business cycles Display 1 illustrates how careful statistical disciplined framework and more robust analysis can help to “decompose” a risk management. In our opinion, this • High dispersion8 of central manager’s returns and shine a light on the has translated to more stable, albeit lower, banking policy drivers of inter-manager correlations.9 returns for the strategy. 8 Please see Glossary for definitions. 9 Please see Glossary for definitions. The statements above reflect the opinions and views of Morgan Stanley Investment Management as of the date hereof and not as of any future date and will not be updated or supplemented. All forecasts are speculative, subject to change at any time and may not come to pass due to economic and market conditions. Past performance is not indicative of future results. SOLUTIONS & MULTI ASSET | MORGAN STANLEY INVESTMENT MANAGEMENT 3 INVESTMENT INSIGHT At the same time, markets have become DISPLAY 2 much more competitive. To combat the HFRI Macro and S&P 500 12-Month Rolling Correlation inherent return degradation, Global 12/31/1990 through 06/30/2018 Macro managers have increasingly adopted 100% a specialist approach, focusing their Tech redit research efforts on such areas as asset class, ubble risis predictive signal type, and time horizon. 80% This has resulted in an explosion in the 60% number and variety of Global Macro strategies, increasing the complexity of the 40% manager selection process. 20% Strong Performance During 0% Market Dislocations From January 1, 1990 to March 31, -20% 2018, Global Macro, as proxied by the -40% HFRI Macro (Total) Index, generated a 10.15% annualized return with an -60% associated annualized volatility of 7.15%, 12/90 6/93 12/95 6/98 12/00 6/03 12/05 6/08 12/10 6/13 12/15 6/18 representing 50 basis points of excess annualized returns over the S&P 500 Source: Hedge Fund Research Inc. and Bloomberg while incurring 711 basis points
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