Macro hedge funds add $2.5 billion as trades proliferate

Hedge funds that bet on economic trends are attracting cash at almost double last year's pace as they seek to profit from events such as Europe's sovereign debt crisis and China's decision to let the yuan trade more freely.

So-called macro funds pulled in $2.5 billion through April, compared with $4 billion in all of 2009, according to researcher BarclayHedge Ltd. of Fairfield, Iowa. The category had the second-highest average returns after fixed-income funds in the past 36 months, even after losing 1.2% in May, data from Chicago-based Hedge Fund Research Inc. show.

The challenge for investors is selecting from hedge-fund managers with sharply diverging investment views on Europe, where rising budget deficits are roiling the euro; China, which has signaled that it will let its currency gradually appreciate; and emerging markets such as Brazil, where growth is accelerating. Macro funds wager on such trends by trading currencies, bonds, stocks and commodities.

“There is a lot of uncertainty in global markets at the moment, so we are adding short-term trading funds,” said Jose Galeano, chief investment officer at 3A, a unit of Geneva-based Banque Syz & Co. that has invested $2.2 billion in hedge funds for clients.

Hedge funds attracted $23.7 billion through April, bringing assets to an 18-month high of $1.65 trillion, according to BarclayHedge. Deposits into macro funds, which oversee $94.9 billion, equaled 2.7% of assets.

That topped bigger categories including distressed securities, emerging markets and fixed income, which each had inflows of 1.6% of assets. The most popular major categories this year are funds that bet on corporate events and those that bet mostly on rising stock prices, both with net deposits of 3.4%, BarclayHedge said.

Macro managers often post a broader range of returns than rivals because they trade in more markets. The range has been even wider this year because of volatile price swings and the diversity of bets on the direction of global economies.

Returns at Peter Thiel's Clarium Capital Management LLC fell as much as much as 5.5% in the week ending June 11, leaving a loss of 6.5% this year. Clarium has been wagering that the U.S. is entering a deflationary period, which would lead to falling stock prices and a stronger dollar. Armel Leslie, a spokesman for the San Francisco-based firm, declined to comment.

Colm O'Shea, who runs the $5 billion Comac Capital LLP in London, saw his Comac Global Macro Fund climb 6.6% this year through June 4. His returns were boosted by bets against the euro.

Alan Howard, founder of London-based Brevan Howard Asset Management LLP, said at the start of the year that he'd never seen a time when two diametrically opposed forecasts – a deflationary bust and an inflationary spiral – could be argued with equal conviction. Almost six months later, there's still little consensus on such macro-economic issues.

Brevan's BH Macro Ltd. fund has climbed about 1.15% this year, according to data compiled by Bloomberg. The firm's BH Global Ltd. fund has returned 9.3%.

Hugh Hendry, chief investment officer and co-founder of London-based Eclectica Asset Management, whose fund has climbed 10% this year through May, is forecasting the euro is “finished” as Germany may leave the currency shared by 16 European nations.

“The Germans will let Europe go,” Mr. Hendry said at the GAIM International hedge-fund conference in Monaco last week. “They will say, ‘We are cutting off ties here and you are on your own. We are German, we are rich and we will stay rich.'”

The euro has plunged about 14% this year to $1.22 amid concern that Greece and other European nations will default on their debt.

Michael Novogratz, principal of New York-based Fortress Investment Group LLC, whose Drawbridge Global Macro Fund climbed 2.8% this year through June 4, disagrees.

“If the Greeks make an effort to get their house in order, they will be bailed out,” he said at the conference. The euro could trade at parity to the dollar, or even slip lower, at which point European policy makers will come together and buy sovereign debt to support the currency, he said. Fortress had $3.3 billion in macro funds as of March 31, according to regulatory filings.

Mr. Hendry said he's betting China's “credit bubble” will burst, causing its economy to contract and triggering a global crisis.

“They have been producing GDP growth, but I don't see the wealth,” he said. “And the absence of wealth makes them vulnerable.”

Mr. Hendry's firm has bought options on 20 companies in international markets that will profit from “a dramatic collapse” of China's growth that's been fueled by an unprecedented lending boom.

Mr. Novogratz said he isn't so pessimistic. He sees Chinese economic growth slowing as the country shifts to building low- end residential properties from high-end buildings.

“I don't think they will be able to make the hand-off graciously. In the short term I expect commodity prices to be lower and China's growth to slow, but I don't expect a collapse,” he said.