I was having an email conversation with an opinion journalist who shall remain nameless (because I didn't clear this with him). We were going back and forth about the impact of inflation and he said that he was concerned that if we didn't get ahead of the issue, we were going to have a public debt crisis. I told him we already have one.
For the last 15 years or so, I've worked exclusively at 'Macro' hedge funds. My Resume includes names like Caxton Associates and Moore Capital, which along with the 7 or 8 other firms that are their peers, are all considered to be 'powerhouses' funds. But even at their largest, they typically have something between 15 and 20 Billion dollars under management, no more.
In fact, the industry legend is that Paul Tudor Jones helped his friend Louis Bacon start Moore Capital by referring those investors he was turning away from his own Macro hedge fund (for lack of capacity) to Louis's firm. I don't know if it's true anymore than anyone else - but it is a story that people tell. Anyway, 20 Billion seems to be a magic number in the Macro hedge fund space, and if you are managing more money than that your returns seem to suffer for it.
In the meantime if you look at this link, you'll see that the Federal Reserve has purchased more than 6 billion dollars worth of US Treasuries, on at least 12 of the last 30 days. On that pace, it would have taken them roughly three and a half days to have become one of the largest hedge funds in the world.
Sometimes I hear a talking head say that things must be (good/bad) because of what interest rates are indicating. But with the Fed buying that much of the issuance, the interest rates aren't telling anyone anything except that the Fed is open for business. The question that I and many of my peers are asking ourselves is not 'what do interest rates currently tell us', but 'what will happen to interest rates when the Fed (operating as the worlds largest hedge fund) stops buying bonds?'
I'm not saying we shouldn't be doing QE, on the contrary, I believe we should. What I'm saying is that if you think it will be painless for them to simply 'stop', then you're dreaming. The event that must be avoided at all cost is a run on the dollar. A run on Treasuries should be avoided too, because there is an excellent chance that it will lead to a run on the dollar. But without QE, we would very likely already have had one or both.
QE is buying us the time to undo some of the systemic fiscal problems with our public finances. It's working as far as that goes. And if we now act like grownups and address the fiscal insanity, then we can all go on more or less as we are. If not, then with QE in place the odds about 50 - 50 that we face economic oblivion. Those are bad odds because there are a lot of problems. But without QE I believe oblivion would be certain, so I'll take 50 - 50 any day.
6 comments:
So what distinguishes a 'Macro' hedge fund? Its size or its focus on "macro' economic events?
From years of watching Wall Street Week, I learned that there are 'value' investors and 'technical' investors. How are you 'quants' different from the technicians?
Macro funds typically try to exploit macroeconomic information. Size isn't relevant except as defined by the limits of liquidity. Although there are services you'll need that are awfully expensive unless you are a minimum size of about 50 Million. It's rare to see a fund bigger that 20 Billion, and also unusual to see an individual manager who controls more than about 4 Billion. But that's mostly just because of liquidity concerns.
As for the other definitions, value vs. technical describes the subset of equity investors and tries to categorize their analysis. But for professional investors, those things only describe a tiny subset of the tools we use, not the way we decide.
The real breakdown for us is really in terms of 'discretionary' or 'quantitative'. And many strategies are actually in between the two. Take the example of a guy who performs his own quantitative analysis before coming to a discretionary decision, or the quant who uses his discretion to determine which factors to quantitatively analyze. There is a lot of grey area.
I'm sorry - I don't mean to sound evasive, but the word 'quant' is part of a language which has grown up for insiders and it's designed to abbreviate something which most people outside the industry have never heard of. So I'm having trouble explaining it without going way off into the weeds. I have written about some of this before though:
http://freenj.blogspot.com/2010/12/where-hell-do-you-get-this-stuff.html
Here is also something I posted on Freerepublic ages ago:
http://www.freerepublic.com/focus/f-bloggers/2078486/posts
I have another question, and I mean you no offense in asking it.
How is what a hedge fund does different than arbitrage, and what economic value does it add?
That doesn’t offend me at all – perfectly reasonable question.
Arbitrage probably doesn’t mean what you think it does. Basically it just means trading a difference – a relationship between 2 instruments. It used to be that the term was used to describe someone would try to trade a stock simultaneously on 2 unconnected exchanges, but these days all the exchanges are connected, so that doesn’t happen much anymore.
The big banks still do Equity index arbitrage (you need a low cost of capital to do it), which is simultaneously trading the index future and all the stocks which are components of it. and virtually all bond trading is an arbitrage of one kind or another. I get the impression you've been told differently but the truth is, arbitrage does add economic value.
It facilitates liquidity, and helps in the distribution of information (which is what exchanges are really for in the first place).
That liquidity lowers the execution cost of investing, increases the cumulative capacity of the markets, and adds to the efficiency of capital aggregation. In other words, it makes it easier for people to raise money to build other businesses. It’s an indirect benefit so many people (especially liberal people) seem to have a hard time connecting the two.
As for the direct economic value added by Hedge Funds, first and foremost, we deliver the service of risk management. We claim that we are better at understanding markets and managing risk than other people. And just like in other service industries, some of us are better at it than others. If you look at the industry wide returns for hedge funds, you’ll see that overall, they don’t typically outperform the market by enough to justify their fees. But the firms I’ve worked for have, and they’ve done so for decades.
I myself have never had a down year, and only one year where my return was below 10%. But that’s just one component of how we market ourselves. Typically we ‘sell ourselves’ on our cumulative risk (measured a variety of ways) our overall return, and most important, our correlation (or lack of correlation) to other strategies.
If you can come up with something that’s profitable that’s great, but if it also is up when other strategies are typically down, that’s even better. But with so many smart people pouring over the same information, it’s really difficult to come up with a totally unique way to do things. In most cases every time someone thinks they’ve discovered something new about the markets, it turns out that it’s either being done by hundreds of people already or it’s something that will lead to an eventual ‘blow up’ and you just haven’t been doing it long enough to see one yet.
Anyway - the point is, we are risk managers. We identify and quantify market, political, and other risks and help to use that knowledge to improve investment return.
Which do you prefer: Investors Business Daily or the Wall Street Journal?
I don't typically read either (although I do read the OpEd page of the WSJ about twice a week or whenever they write a piece that interests me)
I get my news typically from my desktop. The Bloomberg Terminal is the industry standard (although I don't care for it as much personally because they treat their customers so badly) but Reuters also distributes a news wire. That's where I get most of my news.
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