Donald Rumsfeld made these comments back in 2002 about the war on terrorism. Today, the enemy comes in a different guise: COVID-19 has unleashed a new wave of acute future uncertainty. Financial markets around the world are reeling from the panic and economic paralysis generated by lockdowns. We believe macro investing retains a key role in investors’ portfolios, helping them navigate these uncertain times by delivering complementary types of return to more traditional sources.
Macro strategies look to generate returns both directionally, by taking outright views on asset class or market returns, as well as in relative value trades, capitalizing on dislocations in pricing. The lack of constraint that macro strategies operate with enables them to be highly agile in when and how they trade, long or short, enabling portfolio management teams to leverage their conviction. This flexibility is a key reason why these strategies can generate attractive returns in volatile markets. At Mercer, we view macro in two categories:
Discretionary macro typically involves an investment manager or team of traders making final decisions on positions. They often run high-conviction portfolios, expressed using innovative structures to create asymmetric profits (strong upside potential, with managed downside) while addressing risks of liquidity and timing. They are able to benefit from periods of market stress and uncertainty through very opportunistic and selective participation in asset classes, geography and instruments. Their lack of constraint enables them to be flexible in how they take risk, informed by broader market conditions and potential for returns. Collectively, these attributes allow skilled macro managers to benefit from both rising or falling markets, as well as dislocations between asset classes or regions. Their flexibility also enables them to react quickly to changes.
This encompasses areas such as managed futures strategies (price-based trend followers over various time horizons) as well as more fundamentally driven or mean-reverting quantitative approaches. Both rely on systematic rules-based methods to developing trade ideas and implementing them, usually targeting a certain risk level (volatility target). Strategies in this universe typically seek the broadest and most diversified risk expression globally to gain statistical edge: a differentiator to discretionary macro. They seek to provide diversifying sources of return drawn from the widest range of signals, asset classes or regions. Their rules-based approaches aim to exploit behavioral biases of market participants while limiting risk factors such as liquidity.
Both types of macro strategy have historically performed well in markets that are more volatile and can play a role in diversifying sources of return, particularly during stressed or uncertain environments. This was particularly evident during the recession of 2001 and the Global Financial Crisis (GFC) when a number of strategies showed an ability to generate different sources of returns for investors during the broader market downturn. The following charts highlight the performance of the HFRI macro index, including both discretionary and quantitative approaches net of fees, as well as the SG CTA index, which focuses on systematic macro strategies, net of fees, relative to global developed equity.
Figure 1. Drawdowns of selected indices versus level of volatility index (VIX)
Figure 2. Performance of selected indices (December 31, 1999 = 100)
Figure 3. Monthly returns of selected indices in 2020
Source: Thomson Reuters DataStream. Indexes used are MSCI World Index, HFRI Macro (Total) Index, SG CTA Index, CBOE VIX Index. Period shown in figures 1 and 2 are December 31, 1999, to March 31, 2020. All returns are in US dollars. HFRI Macro, SG CTA returns are net of fees; MSCI world are gross of fees. The drawdown values in figure 1 represent the cumulative negative return from each index’s prior high. All data as at April 17, 2020.
Macro strategies appear to be demonstrating their ability to deliver diversified sources of return again in the volatile markets of 2020. Performance of the same indices for the first quarter of 2020 shows these strategies outperforming traditional sources of return like equity as volatility and uncertainty returned to markets. This is due to an ability to find opportunities and provide different sources of return at times when other traditional sources struggle, instead of any structural tail-risk property.
HFRI’s mid-April estimate (net of fees) for macro (total) is +1.2% through to the end of March 2020; SG’s CTA index (net of fees) is -0.6% over the same period. However, both these indices mask high levels of return dispersion reinforcing the importance of manager selection.
The more agile and experienced discretionary macro managers were able to position ahead of the spike in volatility by generating profits across interest rates, commodities, currency and credit. Their flexibility in asset class, region and instrument selection enabled them to navigate effectively through the liquidity crunch in markets, often using derivatives like options to limit downside, but capture significant upside. Directional managers tended to outperform those with relative value biases while those with a skew to developed markets typically did better than those with an emerging markets focus in this first phase of market reaction. Early estimates show that over half of discretionary macro strategies that are highly rated by Mercer delivered positive net performance over the first three months of 2020.
In the systematic space, index-level data again masks a broad spectrum of returns. Using Societe Generale’s Nelson report, which tracks over 240 managers’ monthly net returns, we found that the average return for this period was +1.3%, spanning a range of -30% to over +50%, reflecting the wide range of different volatility levels of programs and systematic styles. Outperformance to date has been driven by time horizons (shorter and medium term performing better than slower systems), with strong contribution from fixed income, commodities and currency.
At Mercer, to help clients navigate the systematic macro space, we have split it into three segments: pure trend, diversified trend and multi-strategy.
Systematic and discretionary macro strategies, so far and in aggregate, appear to be performing broadly as expected in this period of heightened uncertainty. Many of these firms learned valuable lessons from 2008, which have helped them weather liquidity and operational challenges in stressed environments. They have been at the forefront of technological innovation in trading and execution particularly in the systematic space, which we believe positions them well for a computer-driven future. Some of these managers have been able to pass on these efficiencies to investors in the form of reduced fees, which have fallen on average over the past decade, particularly in the systematic pure trend space.
The war on COVID-19 has led to a vast range of different responses from governments globally. The effect and impact of these actions remain unclear, and uncertainty in markets is likely to endure. The scope and efficacy of policy measures, their duration and, above all, the longer-term social and economic impacts of the virus pandemic are unknown. We are entering uncharted waters. The repercussions of the coronavirus will be far-reaching and will likely contribute to ongoing sources of volatility across financial markets for some time to come.
Is macro playing its role? Does it still hold value for investors looking ahead? We think so.
The current environment offers up strong opportunities for both types of macro strategies: discretionary with their agility, and systematic with their diversified rationality. Stylistically, both directional and relative value approaches remain compelling — the former more immediately in the eye of the storm, where careful and selective participation can limit downside; the latter in the transition back to more normal relationships.
As conditions start to stabilize and the big outright moves in markets slow, visibility on any recovery may start to improve — but only then will the real impact start to surface in economic and corporate data. Dispersion regionally in markets and between asset classes will likely continue and provide significant opportunities. Our Mercer-rated macro managers all corroborate this strong outlook, with many opening up for new capacity for the first time in many years.
 Hedge fund indices constitute a highly diverse and heterogeneous group. Methodology and composition can vary significantly between one provider and strategy to another. The HFRI Macro (Total) Index provides the longest data set across more than 200 managers equally weighted net of fees. It combines discretionary and systematic approaches as well as directional and relative value styles across a range of volatility, concentration and leverage limits. The index rebalances annually. The SG CTA Index is a more specialist index focused on the managed futures universe dating back to 2000. The index is comprised of the largest 20 managers (AUM) who primarily trade futures, are highly diversified, are open to investment and report daily net of fees. It is equally weighted, rebalanced and reconstituted annually on January 1.
 The estimates provided to Mercer are unaudited for each of the strategies that we research as at April 14, 2020.
 We have used the Nelson report of April 14, 2020, courtesy of Societe Generale.
 For further details on how and why we have broken up this universe, see our 2019 paper “Managed Futures, Past and Present,” available at http://www.mercer.com/content/dam/mercer/attachments/private/nurture-cycle/gl-2019-wealth-managed-futures-past-and-present-mercer.pdf.