After five years of consistent double digit returns, Omni Partners Macro Fund ended 2013 down -4.87%, the first time the fund ended in the red in its seven year history, according to a letter to investors reviewed by ValueWalk.  The London-based hedge fund has a total of $1.4 billion under management in three strategies.

Macro Fund

Early hedge fund investors in the discretionary fund had grown accustomed to a 14.42% compounded annual return and were disappointed by 2013’s loss as well as the paltry 0.73% gain in 2012 – both years the stock market enjoyed robust double digit gains.

Macro fund was positioned for rising interest rates

The fund’s December 2013 investor letter notes the fund benefited from a short position in the currencies of ZAR (South African Rand) and INR (Indian Rupee), while they suffered losses in Oil.  The firm is positioned for rising interest rates and questions the equity market to a degree, saying “we would argue that rising (real) risk-free yields seriously start to undermine the case for purchasing equities at current prices.”

Discretionary fund manager  

The Global Macro fund is operated by Stephen Rosen, who makes trade decisions based on public policy, market behavior, interest rates and liquidity.  Trade time horizon is three to five months and the strategy goes long and short equities, commodities and financial products.

Many hedge fund managers who rely on “natural” market relationships have been stymied by Federal Reserve efforts to influence interest rates since 2011 as “normal” market behavior has seemed skewed.  However, in late 2010 Mr. Rosen correctly called an inflation hedge based on the start of Quantitative Easing, according to a report.

A hallmark of Omni Partners Macro Fund’s approach based on risk management.  The firm is quick to limit drawdowns, typically cutting the trade position size in half after experiencing a 3% loss on a particular position.  This focus on risk management can be seen by looking in detail at the performance numbers, in particular the positive Sharpe Ratio (1.03).  The Sharpe Ratio is a measure of volatility relative to returns.  The higher the number the better the ratio of high returns to low volatility.  Typically any number above .75 is considered positive.  By way of comparison, the Sharpe Ratio for major stock indexes is typically in the .35 range.  To particularly savvy professional investors, Omni Partners Macro Fund’s low downside volatility (3.85%) relative to the high upside volatility (13.18%) is most interesting. This means that negative volatility (during losses) has been controlled while potentially positive volatility (during gains) is left to run.  Professional traders call this “giving a profitable trade room to run higher.”