Giving Global Macro Funds a Second Glance

Morningstar's rapidly expanding multialternative category can be informally divided into three groupings: multistrategy funds (the largest cadre, either subadvised by external managers or run internally), hedge fund replicators (who try to capture so-called hedge fund betas through quantitative means), and global macro strategies. Global macro managers have wide latitude to invest long and short across world regions and asset classes. As the name global macro suggests, these managers typically make allocation decisions based on broad macroeconomic views, and they seek out both directional and relative value opportunities. Global macro funds commonly use highly liquid instruments, such as equity or currency futures. In many hedge fund taxonomies, managed-futures strategies are considered a systematic, nondiscretionary subset of global macro.

It's possible to find funds that use roughly similar approaches in long-only categories like world allocation or tactical allocation:

A Performance Upswing After several years of muted returns from global macro funds, the strategies have shown more of a spring to their step from late 2014 to early 2015. For instance, for the three years from 2011 through 2013, the Wilshire Liquid Alternatives Global Macro Index (which also includes managed-futures and currency funds) returned an annualized negative 0.65% per year. Over the past 12 months through March 2015, by contrast, that index has produced a 12.15% return, well ahead of the multialternative category's average 3.46% return for the same period.

While it's hard to pin down success to any one factor, given the wide range of approaches and trades among global macro managers, in general it seems that greater volatility and thus dispersion among global markets has helped generate more opportunities. Some of these same factors have led to improved performance for managed-futures funds. In particular, long-dollar trades and short commodity positions have been positive contributors for many managers. Generally speaking, global macro managers will lag on a relative basis when markets are narrowly directional (as has been the case for the previous few years with U.S. large-cap equities and intermediate-term bonds dominating global markets).

Whereas multistrategy funds can be thought of as one-stop shopping sources for alternatives exposure, investors can't really use global-macro funds in the same way. While most strategies do have relatively low betas to global equity markets, and thus are useful as diversifiers, they don't necessarily provide access to the full range of alternative-investment capabilities. Thus they are probably best used within a broader sleeve of alternative funds, or perhaps as part of a tactical sleeve alongside an investor's strategic portfolio allocation.

Morningstar Analyst Coverage Of the 18 multialternative funds currently covered by Morningstar analysts, we'd characterize five as running global-macro strategies. Among those five, however, two pairs of funds share core strategies, with some meaningful differences at the margins. Two receive Morningstar Analyst Ratings of Bronze, and three are rated Neutral.

With many firms rolling out new global macro funds in recent years--often leveraging existing institutional capabilities, but sometimes poaching outside talent--investors will have a greater set of choices, and Morningstar will likely increase the number of funds it covers over time. Of note for investors who wish to explore beyond Morningstar's current coverage list are Invesco Global Targeted Returns GLTYX, run by two managers formerly associated with Standard Life's global absolute return strategy (discussed below), and William Blair Macro Allocation WMCIX, a $1.3 billion fund headed by managers from a global macro hedge fund acquired by William Blair in 2011.

UBS Dynamic Alpha

BNAAX

Year-to-date return through April 14, 2015, 3.93%

This fund was recently upgraded to Bronze, on the heels of an upgrade to the rating of parent UBS to Neutral from Negative. We'd already been fans of the team that runs this fund, which has been overseen by Curt Custard since 2008 along with two comanagers who joined a year later. Importantly, they are backed by a 48-person analyst team that scours the globe for trades and whose compensation depends in part on the success of its trade recommendations.

MFS Global Alternative Strategy A

DVRAX

Year-to-date return through April 14, 2015, 4.58%

Also rated Bronze, this fund leverages the global solutions team from UBS Dynamic Alpha (which acts as a subadvisor to the fund), and layers on top of it the stock-picking expertise of MFS. In this distinctive configuration, MFS allocates to the best ideas of managers across its stock team, with a portfolio run in a static mix of 80% stocks (tilted internationally) and 20% bonds (largely there as a diversifier). The UBS managers determine how much exposure to the MFS portfolio they want at any given time and use futures to increase or decrease beta exposure around the MFS equity strategies. An investment in this fund is a calculated bet that the MFS team can add alpha on top of the UBS global-macro strategy.

JHancock Global Absolute Return Strategies

JHAAX

Year-to-date return through April 14, 2015, 4.57%

This Neutral-rated fund is subadvised by Scotland-based Standard Life, which has been running a hugely successful version of this strategy in Europe in 2008. Originally used by John Hancock in its allocation products when it launched in 2011, it's since been made available to individual investors. A knock against the fund is that the management team has experienced significant turnover, with several of its key decision-makers poached by other firms. However, the research and trading resources of the team are deep, and lead manager Guy Stern, a key architect of the original strategy, remains in place.

Putnam Absolute Return 500

PJMDX

Putnam Absolute Return 700

PDMAX

Year-to-date return through April 14, 2015, 1.67% and 2.67%

Putnam was an early and aggressive entrant into liquid alternatives, heavily marketing its absolute return funds, gaining and then losing significant assets. Still, the core asset allocation team here is experienced, having run a similar institutional strategy for several years before the retail funds opened. Putting return targets in the funds' names inevitably set expectations too high, but the managers have done a decent job producing steady returns and relatively low volatility. However, the 2013 departure of former lead manager Jeff Knight, who founded and was the face of this allocation group at Putnam, was a significant loss, contributing to its Neutral rating.