Systematic global macro August performance

All firms have not reported returns for the month of August, but a review of a selected number of managers suggest that there was wide dispersion in performance across managers. The Barclay Hedge, BTOP 50, Newedge, and HFR indices, on average, showed a decline of just under -2%, but within those numbers are managers who showed strong gains, flat performance, and poor numbers. When markets show sharp declines and there is a increase in volatility, there will be greater dispersion in manager performance within the managed futures and global macro category. In fact, this will occur across all hedge fund categories.The cross-sectional performance will be show bigger dispersion in down markets because management differences whether stop-losses or derisking become more relevant and important. Clearly, difference in style within global macro and systematic managers becomes more relevant in these more volatile markets. There will be clustering of performance based on characteristics when there are strong market moves. In calm trendless markets, performance could be random. In trending but calm markets, performance may seem regular, and at market extremes there will be clustering based on characteristics. 

Let's take a simple example. If there are well defined trends, with constant volatility, it is likely that many systematic managers will have the same trades and thus similar performance. This is likely even if the manager is a short-term or long-term trader. The correlation across managers will be high and all managers will seem to be alike. In calm trending markets, all managers seem to be generating similar "beta". Only when there is a higher volatility and return dispersion across markets will the nuances of managers start to become more prevalent. For example, differences in stop-loss management would have had a significant impact on performance especially since there were some song reversals. This that either had or did not have equity exposure would have been a strong driver of performance differences. Volatility targeting would have placed a big roll in cutting position exposure during August. Hence, due diligence and the picking of managers is more important during these extreme periods. Diversification matters at the extremes. 

Of course, the managed futures and global macro did much better than the down 6% in equity markets, but the average firm did much worse than the Barclay's Aggregate bond index which was flat for the month. Global macro would have outperformed a 60/40 stock/bond mix but that is only if you had the average return. August was a month of volatility management with the return of RO/RO trading based on macro events such as China and Fed thinking. It would have paid to have held a portfolio of global macro managers with different styles in August.