Despite the fact that systematic, macro-style investment strategies have been around even longer than hedge funds, they continue to be misunderstood by many investors, including those who use other hedge fund strategies. Alex Kamunya, a senior research consultant with NEPC, aims to correct this imbalance in a new whitepaper, Demystifying Systematic Macro Hedge Fund Strategies.
What is Systematic Macro?
The terms “systematic macro,” “managed futures,” and “CTAs” all describe strategies designed to profit from inefficiencies and trends in long-term macroeconomic cycles. These strategies are model-driven and rules-based, using buy and sell signals based on historical and statistical analysis. Systematic macro strategies aim to generate returns by taking long and short positions in global markets across asset classes: equity indexes, government bonds, currencies and commodities. These positions are commonly established using futures contracts.
Mr. Kamunya divides the broader “global macro” strategy umbrella to include by “discretionary” and “systematic” subsets. Underneath the “discretionary global macro” umbrella, he puts directional and relative value strategies. Underneath “systematic global macro,” the focus of his paper, he puts technical and fundamental varieties.
Trend-Following (Momentum) and Counter-Trend (Value)
For the most part, Mr. Kamunya’s focus remains on technically based systematic macro strategies, which he further subdivides into trend-following and counter-trend strategies. Trend-following is most commonly utilized, according to Mr. Kamunya, and it involves entering positions after a trend has been established in expectation of the trend continuing. Counter-trend strategies, by contrast, look to buy when markets are oversold and sell when they’re overbought.
Value-based systematic macro strategies are less common, but one “particularly large manager in this space” is fundamentally driven, according to Mr. Kamunya. Fundamental strategies can be divided into momentum and value strategies, which roughly mirror the trend-following and counter-trend strategies used by technicians.
Trend-following and momentum strategies tend to lose more often than they win, but provide larger gains on each successful trade; while counter-trend and value strategies tend to win more often than they lose, but provide smaller gains on each successful trade. Either way, the strategic subsets have low correlation to one another, which means using them in combination can provide further diversification benefits.
Systematic macro strategies have very low correlation to traditional asset classes. Indeed, from April 1994 through June 2014, systematic global macro strategies exhibited a -0.02 correlation to the MSCI World Index. More importantly, the Barclay CTA Index – a good proxy for systematic macro strategies – gained 9.5% from September 2008 to March 2009, while the S&P 500 fell by 37.6%.
Historically, this low correlation has resulted in portfolio diversification benefits, which have resulted in lower drawdowns. Systematic macro funds have also enjoyed high liquidity and ample transparency. But although the strategies have a long and successful track record, they have lagged recently, as the broad stock and bond markets have rallied.
While systematic macro outperformed during the financial crisis, the strategies have underperformed since then. Is this simply part of the investment cycle? Or could it be that the unprecedented monetary stimulus by central bankers in response to the crisis has broken systematic macro models? Mr. Kamunya doesn’t think so: He says the belief that eventually all models break is “another misconception that investors may have.”
With the publication of his whitepaper, author Alex Kamunya says he hopes to “build a better understanding of systematic strategies by linking the underpinnings of these strategies to what drives their returns.” Inefficiencies in markets, which are caused by business cycles and central bank policies, aren’t going anywhere anytime soon, and successful systematic macro strategists will likely find a way to profit from these inefficiencies.
For more information, download a pdf copy of the whitepaper.