|| Illustration by Kimberly Lum for Institutional
It is hardly a secret by now that
macro managers have been having a rough time for the past
few years, mostly posting losses or small gains.
They generally blame the lack of volatility in the markets
and abrupt changes in the direction of profitable trades, among
other factors, for their woes. Some funds failed to have a
large exposure to winning trades.
However, they may soon get their wish for more volatility
— and other conditions they deem favorable for their
strategy — if the predictions from a recent survey
conducted by quantitative hedge fund titan
Two Sigma Investments prove correct. The semiannual survey
of about 100 sell-side macro specialists found that the
potential for a trade war between the United States and a major
trading partner is their chief macro concern. The respondents
also expect this macro event to touch off a flight to quality,
with rising bond prices and U.S. dollars but also a drop in
global equities and commodities. The survey participants also
see increased odds of a euro zone breakup due to upcoming
On the other hand, the macro mavens have sharply reduced
their fear of a breakdown in central bank authority since the
last survey, six months ago. Altogether, Two Sigma asked the
respondents about eight selected macro risks and their market
Two Sigma, founded by former D.E. Shaw colleagues
David Siegel and
John Overdeck, likes to call itself a technology company.
The data-driven firm invests by using computers to make
portfolio decisions. A spokesperson for the firm stresses that
Two Sigma does not use the insights from the survey to turn
them into models and trade on them.
Still, it is very interesting to see how the sell-side macro
experts view the world. These people work in sales, trading,
and research roles at broker-dealers and research firms. The
most recent survey took place from March 27 through April
Specifically, almost 60 percent of the macro analysts who
participated in the survey fear the U.S. will precipitate a
trade war with a major trading partner. The consensus is this
would boost bond prices by a mere 3 percent and the U.S. dollar
by 4 percent, "possibly in the flight to quality," the report
At the same time, the macro analysts expect equities to take
a big hit, led by an 18 percent drop in emerging-markets
equities. They also fear a 14 percent drop in developed-markets
equities but just a 9 percent decline in U.S. equities.
Macro mavens also see energy commodities dropping by 10
percent from a trade war.
More than half of the respondents also expressed fear a
populist party will prevail in upcoming elections in Germany,
France, Italy, or Norway, which they believe will destabilize
the euro zone. This is significant given that in Two
Sigma’s previous survey, conducted in October,
there was little concern voiced for the euro zone. However,
keep in mind that since the survey was conducted, populists
lost in Italy and seemingly are on their way to losing in
France, (although we have seen surprises in this area
In any case, the macro experts think populist victories
could result in losses in the mid- to upper teens for
developed-markets equities and emerging-markets equities.
Macro investors are concerned about how various equities
markets would respond to other macro events as well.
For example, they expect declines ranging 19 percent to 23
percent for all three classes of equities — U.S.,
developed excluding U.S., and emerging markets — in
response to an asset class or industry bubble burst.
Other potential events that the analysts say could have a
big negative impact on certain equities markets include a hard
landing in China or an emerging-markets sovereign debt
Looking at the euro, macro experts think the currency is
most vulnerable to three events: an emerging-markets sovereign
debt crisis, the upcoming European elections, and global
deflation. Each of these events could cause the euro to drop 20
percent or more, these respondents assert.
On the other hand, macro sell-side experts are least
concerned about global inflation. "Despite increasing reports
of rising global prices and potentially expansionary U.S.
fiscal policy, survey respondents do not seem to view global
inflationary pressure as a chief concern," the report states.
However, should this occur, the experts think the Japanese yen
would be highly vulnerable.
With regard to various commodities and interest rates,
energy commodities are by far most vulnerable to a variety of
possible macro events, the most concerning of which is a hard
landing in China, followed by a sovereign debt crisis.
U.S. bonds would fall by about 24 percent if there were
global inflation, the analysts predict, while German Bunds
would drop about 15 percent.
Two Sigma makes it clear it is not predicting any of these
scenarios or market reactions. In fact, I am told they think
they need at least five years of data to determine whether
these so-called experts are making correct predictions.
In any case, if one or a few of these scenarios play out,
one thing is for sure: We will finally find out whether the
macro funds that have been posting mediocre returns in recent
years were just making excuses or were right.