Macro hedge funds are often like the canary in the coal mine. Macro fund managers apply currency strategies, interest rates strategies and stock index strategies based on their views of the evolving macroeconomic situation of a specific area (Eurozone, U.S., Latin America, etc.) to try and make profits. Their job is to analyze current economic data to see where a regional economy is going in the next few months/quarters and position themselves accordingly.
Correctly predicting the future can lead to large profits, but getting it wrong can be quite expensive, so macro hedge fund managers work hard to be right more often than wrong. Macro hedge funds are not short-term investors as macroeconomics typically play out in the scale of months or quarters, but savvy investors have found that following the actions of macro hedge funds can be a good “economic warning system” as they tend to be ahead of the investing curve.
As an August 12th report from Credit Suisse Prime Services highlights, macro funds are now net short U.S. equities for the second time this year, but are still holding a significant net long position in the stock indices of QE-reliant European and Asian developed markets.
The reduction in net exposure to U.S. equities by macro funds to an all-time low of -22% particularly stands out when you consider that equity Long/Short hedge funds increased their positions in U.S. stock indices to a top quartile level of 52%, based on the ELS ratio.
Looming U.S. Fed rate hike scares off macro hedge funds
Mark Connors of Credit Suisse argues that the main catalyst for the big move to a U.S. equity net short position is directly related to the recent increase in the probability of a September Fed rate hike (both as suggested by the Fed Funds Futures market and by the Bloomberg function WIRP). Of note, this market-based multi-factor method for calculating the probabolity of a Fed rate hike increased from 20% to 45% in July before hitting a high of 54% in the first week of August. This can be seen in Exhibit 1. You can also see that March’s net short in U.S. equity indices was quickly covered following the Fed's dovish comments, suggesting macro fund managers think a rate hike will be a strong headwind for U.S. equities.
Connors also points out that apparently QE trumps fundamentals as macro funds remain long in both Asian and European markets (whose underlying economies are currently enjoying QE stimulus due to persistent low growth). He notes: "The chart below hints at the long bias in both the European and Asian developed markets where the Equity net exposure remains at a more normalized 44%. This bias has been profitable for Macro funds, particularly in Q4 ‘14 when their Equity Net long rose from 41% to 67%, properly positioned for the 14% pop in the STOXX 600 from January to February. Time will tell if shorting a Hike will be as profitable."