Watch and Wait on Most Global Macro Funds

Josh Charlson: Global macro funds give their managers wide latitude to invest long and short across asset classes and global regions, and they can shift their portfolios around quickly to take advantage of opportunities. They typically use very liquid derivatives to implement their trades, which makes it easier to make quick changes. But the use of derivatives and quick-changing nature of their portfolios makes it hard for an investor to know exactly how a global macro fund is positioned at any given moment.

That makes the Brexit event a good moment to check in on these funds. Global macro managers often claim that they thrive when there's a lot of dispersion in markets, and as alternative strategies they are typically designed to provide investors with diversification from traditional asset classes.

So how did global macro funds fare during the two big down days following the Brexit vote?

The good news is that as a group, global macro funds held up relatively well. While the S&P 500 lost 5.3%, the MSCI World Index lost 7.1%, and a blended 60/40 index of MSCI World and the Barclays US Aggregate Bond Index lost 3.8%, a subset of 32 global macro funds lost just 1.6%. And that average was skewed by a few outliers who did very poorly. Overall, 28 of the 32 funds lost less than the blended index, and eight ended up in positive territory.

It seems that several factors contributed to these robust results. For one thing, a lot of managers had been maintaining relatively low equity exposure due to concerns about stretched valuations in global markets. In addition, currency trading is a big part of most global macro funds, and many managers had been long the U.S. dollar relative to other currencies. Finally, a number of managers had increased their risk protection or constructed specific trades because of worries about the Brexit vote. For instance, Dreyfus Dynamic Total Return, which is subadvised by Mellon Capital, had been reducing its exposure to European and Asian equities as part of its scenario-based testing, and it had also been long the U.S. dollar with a modest short position on the British pound. The fund lost just seven basis points during the two-day stretch.

Despite the recent good marks for global macro funds, investors still have reason to be cautious. Few of these funds have long histories, and returns for most of them over the past few years have been decidedly mediocre. We do have positive Morningstar Analyst Ratings for a few global macro funds, including John Hancock Global Absolute Return Strategies and MFS Global Alternative Strategy, but investors should take a watch and wait approach to most in this group.