Brett Gillespie, Ellerston Capital global head of macro (Pic: Matthew Fatches)
Brett Gillespie, Ellerston Capital global head of macro (Pic: Matthew Fatches)

Macro trading can provide adaptability, reactivity and a diverse approach to help performance but this broad space, with a range of performance, can be hard to define.

Guneet Rana, senior investment manager at Colonial First State, told the audience at the Investment Magazine Absolute Returns Conference that she has a large allocation to macro trading in the alternatives portfolio she manages.

“The objective of the portfolio is to get, say, cash-plus 4 per cent, low correlation to the equity markets, volatility somewhere half that of the equity markets,” Rana said. “But there is a second objective there, which is the role of the portfolio in the overall diversified fund – and that is diversification.”

Rana applies a framework to analyse manager strategies ranging from risk-off diversifiers, core alpha diversifiers and, “on the other extreme, risk-on diversifiers”, to understand the role of managers and strategies in the portfolio.

“Macro plays a very important role in my overall portfolio, and it sits somewhere in that middle bucket, that middle bucket is more of a core alpha diversifier,” she said. “I have close to 55 per cent allocation, and that’s a big number.”

Adapt for success

Edward Tricker, chief investment officer, quantitative strategies, at Graham Capital, said that from his perspective, successful systematic macro trading strategies have shared the above-mentioned qualities – and they’ve been adaptive.

“Strategies that have been successful have shared probably three different key ideas – they’ve proven an ability to be adaptive,” he said. “As we’ve seen in previous presentations, there have been market conditions that have been quite changeable; there has been no one implementation of an idea that has been probably the best in the last 10 years. Where people have been able to adapt, that’s probably benefitted performance.

Market volatility has been supressed because of unprecedented global monetary policy, and there have been idiosyncratic geopolitical events such as the Brexit vote, US President Donald Trump’s 2016 election, and events in other countries, Tricker noted.

“For things that you can’t predict, what do you do within a strategy so it can contend with these?” he asked. “One of the very important aspects is to have a strategy that can be reactive. If you don’t know when things are going to happen, at least have a strategy that can, when [something] does occur, adjust very rapidly to accommodate it.”

This question of the suppression of market volatility occupied other speakers at the Absolute Returns Conference. Brett Gillespie, head of global macro, Ellerston Capital, noted that the firm’s economist had recently explored the sources of low inflation in the global economy.

“On the question of technology and how much is it supressing inflation, there’s only 1.5 per cent of the CPI basket in the US that’s directly tech, like your phones and your computers and so forth,” Gillespie said. “In total, it’s trivial. One of your best leads is the China export prices to the US, which are now running at plus 1 per cent, when they were running at minus 3 or 4 per cent a few years ago. We’re not getting that deflation impact so much from technology anymore, and it was never that big to start with.”

Gillespie pointed to demographics as a much bigger potential source of lowered inflation, due to lower wage growth.

“We’ve all got the Baby Boomer cohort that’s flowing out of most of the Western economies, but there’s also the Millennial bubble coming through,” Gillespie said. “If you think about the life cycle of a person’s wages, usually they start in employment and in the first third of their career, they don’t get a big pay rise, they’re growing and learning. The big pay rise comes in the middle third, and you sort of stay there.”

Millennials are in the first third of their career, meaning lower wage growth, and Baby Boomers are in the final third of their careers, where there is also slower wage growth.

“That effect we’re finding on this modelling is taking 0.7 per cent off US wage inflation at the moment,” Gillespie said. “The interesting thing is that’s going to [remain] until about 2020.”

After that, Baby Boomers will retire and Millennials will move into prime earning years and that will drive up wage inflation, he said, adding that the trend will start a year earlier – 2019 – in Australia.

Gillespie also said the “bigger story” around lower volatility can be attributed to a “massive output gap” and lack of re-leveraging in the wake of the GFC.

Given the multiple potential sources of suppressed volatility, and the uncertainty as to how long that can continue, Gillespie mentioned that an adaptive active (discretionary) strategy could provide some protection.

Whilst diversification in strategies is important, it’s “a difficult thing to get right”, Tricker noted. “There has been a trend for people to throw lots of things into portfolios without considering maybe why they’re doing it,” he said, which raises the risk of running into issues of leverage or strategies not lining up appropriately.

Rana noted that macro strategies have adapted in response to poor performance as well.

“Macro is amazing, and a very interesting space. The more I look at it, the more cynical I get,” she said. “If you look at the managers that used to run systematic macro strategies, some of them had quite a difficult period over the [last few] years.

“Now they’ve sort of adapted themselves and have launched risk-premia strategies, and in one particular case, [a manager] was in the old systematic macro, and now I see the new, rebadged version, which makes you a bit more cynical. But if you look at it another way, you can say a lot of the strategies have been commoditised and sold at a difference price point. [Managers are] saying, OK, these are certain premia that can be systematically captured, cheaply captured. That’s what I call the commoditised version. That’s one way managers have adapted themselves.

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