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Saturday June 23 2018
 
For Carnivores Only: Like the Grizzly Bear, Global Macro Funds Are Volatile and Unpredictable

Financial Mail  October 3, 1997

 

      In the animal kingdom, few creatures are as terrifying as the grizzly bear. Unpredictable and aggressive, the grizzly goes for the kill. It is not content with a mere morsel of the prey but wants it all.

      Global macro funds are the grizzlies of the hedge fund kingdom, says Dion Friedland, chairman of the Magnum Group of Funds. Aiming to profit from shifts in the world economy, and using leverage and derivatives to accentuate the impact of market moves, such funds are not for the faint of heart. They can be enormously profitable, but they are volatile and unpredictable, and can produce sudden falls.

 

      For instance, during the first quarter of 1994, hedge fund star Michael Steinhardt, whose funds produced an average annual return of 24% over several decades, bet European interest rates would decline and cause bonds to rise. Instead his funds lost 29% when the US Federal Reserve raised interest rates, pushing up rates in Europe.

 

      But just as grizzlies are only one species of bear, so macro funds are different from other hedge funds.

 

      This is an important point given the popular misconceptions about hedge funds fuelled by 1994's declines in funds run by Steinhardt, George Soros and Julian Robertson. They relied on placing large directional investments in stocks, currencies, bonds, commodities and gold - while using lots of leverage. Such measures can create huge returns with high volatility, but fewer than 5% of hedge funds use strategies such as these. Most make consistency of return, rather than size, their primary goal. The majority of funds use derivatives only for hedging or don't use them at all, and many disdain any leverage.

 

      Some hedge fund strategies are not correlated to equity markets, and therefore deliver consistent returns with minimal risk. Take event-driven funds, distressed securities, or funds investing in special situations. By buying interest-paying bonds or trade claims of companies undergoing restructuring or bankruptcy, such funds may avoid the pitfalls of equity markets.

 

      If macro funds are grizzlies, special situations funds can be compared to tortoises - slow but steady, often able to hide from danger beneath protective shells.

 

      Market-neutral funds can also provide steady returns with low volatility. Market-neutral arbitrage funds try to hedge out most market risk through offsetting positions; they invest equally in long and short equity portfolios.

 

      There are dozens of species of hedge funds, varying by strategy, asset class, use of derivatives and leverage, sector and region. Emerging markets funds, for example, invest in equity or debt of less seasoned markets, which usually have higher inflation and volatile growth.

 

      The "fund-of-funds" combines various calculations. Mixing and matching hedge funds and other pooled investment vehicles, it blends different strategies and asset classes to create a more stable long-term investment than individual funds.

 

      The list goes on. Investors need to understand the wide range of strategies in the hedge fund genus, and their differing degrees of risk and return, so as not to overlook opportunities that match investment objectives.

 

      Friedland is a keynote speaker at the FM International Hedge Fund Symposium on November 19-20. More than 30 experts from around the world will speak at the event, which takes place at Gallagher Estate, Midrand.


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