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The Story of Global Macro Investor
Nineteen years ago, in October 2004 I decided to leave GLG Partners, the hedge fund giant I was working for. I loved working for GLG and they looked after me very well and gave me the freedom to try and run a longer-term macro book. Noam Gottesman, my old boss and founder of GLG, remains a cherished close friend and mentor to this day.
To be honest, my last year at GLG in 2004 was a pretty crappy year for me, I couldn’t find a way to make money, after a great three-year run. Years like 2004 happen from time to time, ones where there is no trend and a long-vol position-taker like me simply can’t get an edge. Nothing in macro world was trending. You may remember the SPX in 2004 was an absolute chop-fest of zero trend...
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10-Year Yields were the same...
... and the dollar went nowhere...
Additionally, I had built a decent-sized position in EM (Turkey, India and Russia mainly) but that wasn’t working either...
But the issue wasn’t the lack of ability to make money (as that can happen from time to time), but it was the developments in the hedge fund industry that I didn’t like.
In the 2000s the investor base in hedge funds changed...
The Glory Years
The hedge fund industry in the ‘80s and ‘90s had been built on investments from family offices, a few Fund of Funds pioneers and a handful of sovereigns like the Kuwait Investment Office. The premise was that the high returns of the hedge funds came from higher volatility position-taking, with longer time horizons or leveraged shorter-term trading strategies. This was the rise of Soros, Tiger, Moore, Tudor and the other macro hedge funds, along with the glory days of prop trading at Goldman. Back in those days, funds had 10% to 15% volatility and a target return of 20% to 30% annualised returns. The best funds had several years of 50%+ returns. Those were the glory days.
The risk/adjusted returns of hedge funds, while pulled down a little by the 1998 LTCM debacle, had outperformed the market overall and that led to a HUGE influx of capital from new players – the pension funds and insurance companies – and a much broader pool of Fund of Funds (whose clients were the same pension funds, insurance companies and the new sovereign wealth funds).
The Death of the Macro Returns
These new investors in the market were not after the same return streams as the Family Offices, who wanted large absolute returns, they instead wanted a return stream that look more like their liabilities (i.e., fixed income-style returns) and they forced the industry to accept their vast capital, but with a focus on lower volatility.
Lower volatility is all well and good but it comes at a price: lower returns. This influx of new capital wanted monthly returns that moved less than 2%. This led to a focus on shorter-term return streams and monthly reporting (as opposed to quarterly). A hedge fund’s job was now not to produce the highest returns possible but the highest returns within a monthly variance of 1% to 2%. Although this was a very different game, the industry largely adapted.
The Rise of the Risk Manager Asset Gatherers
The hedge fund industry has always been a game of money. It is an immensely stressful job, as many of you know, for which you understandably want to be rewarded. Generally, longevity in the industry is rare so you are incentivised to make as much as you can while you are able. In the ‘80s and ‘90s, that was all about risk taking, but in the 2000s it became all about managing the monthly numbers and accepting lower returns.
The stark reality is that the new, big-money investors wanted 6% to 8% annualised volatility and would accept 6% to 10% returns. This was very different from the 15% volatility and 30% target returns of old.
Thus, the only way to make money was to create a monstrously large fund in terms of assets, to allow the management fee to be the primary driver of income for the hedge funds, and the only way to do this was via large multi-strategy funds that had massive diversification to dampen volatility and lower returns.
In short, it became an asset-gathering game and not a returns game. The job had shifted from making money for investors to not losing money and creating an income stream that resembled high-yield bonds (but with less risk).
This was the death of the star hedge fund manager and the rise of the star risk manager. The leaders in the industry switched from position-takers like George Soros and Julian Robertson to risk managers like Ken Griffin (Citadel) and Izzy Englander (Millennium).
Thus, hedge fund firms had to adapt or die if they wanted to thrive, and the job of being a portfolio manager became less attractive than being an owner of a giant hedge fund as returns came down.
Old-school macro made no sense anymore
I could see this back in 2003 and 2004 as these new investors piled into the market. I knew that it made no sense to manage your monthly P&L versus the overall total returns on your positions but that had become the game.
In essence, what this meant was that you were forced to trade a four-week view and every month you’d kind of reset your positions based on that so you could report to your investors that you hadn’t had a P&L variance of more than 2%. Instead of buying something and getting a 50% return over two years (while accepting periodic large drawdowns in that position) you had to manage your monthly drawdown in that position instead. Thus, if you made 10% in a position one month but it fell 5% the month after, you were basically forced to cut it. That was dumb.
By the early 2000s, trade time horizons were crushed and it was near impossible for macro investing to generate returns. Macro investing is all about capturing the asset price moves from changes in the business cycle and these take six months to eighteen months to play out.
As Paul Tudor Jones once said to me, “The best investors are those whose idea time horizon matches their investment time horizon”. The reality is that the industry had created a time horizon of one month and that made no sense for global macro strategies.
Macro traders like PTJ or Louis Bacon were able to survive in this environment as they were gifted enough to trade short-term time horizons to match their investors’ needs. But other firms just closed down (Tiger), or many went on to manage their own money (Nick Roditi) or managed capital where they had less constraints (Stan Druckenmiller left Soros Fund Management and managed Duquesne full-time).
Eventually, most of the legends closed their hedge funds and turned them into family offices to trade their own capital, free of the restrictions enforced by external investors (and obviously, their returns rose significantly!).
Time To Get Out
If I have a super-power, it is in spotting long-term trends and, when I saw this emerging trend of the death of hedge fund returns in 2003 and 2004, I knew the glory days of macro were over even though we had all enjoyed an amazing run in the preceding years. I understood my weaknesses and knew I was not a short-term trader as all my ideas were based on macro trends. I loved the macro hedge fund industry, but I recognised it was over for me.
I was also exhausted and burnt out from the whirlwind of six crazy years – from the back-to-back chaos but great, macro environment of the Asian crisis (and LTCM crisis), the Dotcom bust, the 2001/2 recession and 9/11.
I had made some decent money over the years both as a salesman and later as a hedge fund manager but at 36 years old I needed some kind of work to bring in an income and not erode my capital. I hadn’t really made enough to take the bet on living off my capital alone. I understood that income remains the most important asset you can have. But what to do?
Raoul – The Writer/Analyst
In 2003, Morgan Stanley invited me on a trip to China. At the time China was the big, exciting new market and everyone was wildly bullish. I went to China bullish and came back super bearish when I realised that most of the money being spent on the gleaming new cities, roads, bridges, railways etc., was wasted. It was all empty and unused. It was a massive destruction of capital. On the way back from China, I wrote up the trip notes in a piece called, “There’s Something Wrong in Paradise” and, on my return to the office, sent it to some industry friends.
It went viral...
Back in my Goldman days I had also become somewhat well-known for writing for clients on Bloomberg and for macro analysis on the GS chat system. After the China article was so well received, I knew I could write and that people valued my thoughts, and also realised I was a deeply independent thinker.
At GLG I subscribed to two main macro research services – Drobny Advisors (Steve and Andres Drobny) and DSG Asia (Simon Ogus). I reached out to both for advice, and both selflessly encouraged me to start my own high-end research service.
By the end of 2004 I had fifteen years’ business experience, the majority based around the hedge fund industry. I was not merely an observer but someone at the very centre. I knew how people thought, how they spoke, what information they valued and what pressures they were under. Almost no one else in the research business back then had that kind of experience; most came from research functions at banks, and not out of a hedge fund. I had an edge.
I also knew that the focus on short-term returns was going to produce suboptimal returns going forward and I wanted to prove that longer-term macro investing would produce far superior total returns over time, even with the larger volatility.
Time To Do It
So, I decided to hand in my resignation, up my quality of life by moving to the Mediterranean coast of Spain (which had the added benefit of allowing me to filter out the noise of brokers, salespeople, research departments etc., to help me think independently) and start Global Macro Investor.
I talked through my plans with Noam, and he very kindly agreed to support me and has remained a GMI subscriber for the entire eighteen years (of which I am eternally honoured, grateful and proud). Goldman also backed me and have continued to subscribe in various guises since day one.
Beyond that, I had no idea if there would be any demand for Global Macro Investor but GLG and GS had de-risked it for me so I went ahead.
The very first GMI was thirty pages long. I sent it out to everyone I knew for free, received good feedback and continued writing. In March 2005 after the first three months, I had to start charging for the service and closed the free circulation.
It was nail-biting waiting to see if anyone would sign up. Then faxes (!!) started to arrive from people I didn’t even know, to subscribe for Euro 30,000 per annum ($50,000). I was blown away!
The first GMI subscribers were all hedge funds and bank prop desks and the number of subscribers continued to grow slowly by word of mouth.
At the end of 2005, I had my first set of annual results and 71% of my trades were profitable and overall the returns were probably around 35% to 40% (for legal reasons I don’t produce a full set of portfolio returns). People took notice and some of the world’s most famous hedge fund investors joined GMI (and several of them are still with me seventeen years later).
In 2006 I had another good year with an approximate 30% return with 63% winners vs losers. In January 2007 when I reviewed the year in the annual Think Piece I wrote the following, which remains true to this day:
All in all, 2006 was another great year for GMI. As is my objective, I think I should have justified the subscription fee a few times over. Don’t expect it every year, but I am basically hoping to prove that a longer-term view, combined with in-depth research and some technical timing, will generate outsized returns.
There are so few participants in the medium to longer-term time horizon that gains are easier to come by than in the shorter term. This is a point I try to raise almost every month.
Then came 2007 and everything changed...
In 2007 I made an estimated over 100% (!!) in my recommended trade portfolio. Most of my gains that year were in being long equities in the first half and short equities as the business cycle turned more concerning. I had begun positioning for the recession that I had been forecasting for the entire year.
I also gave some advice to my hedge fund clients and bank prop traders:
The low volatility, tight stops and small number of positions that investors seek now, can only mean one thing for managers – lower returns. It’s basic investment management maths. You have to run huge amounts of money to earn anything in that framework as it’s all about the management fee.
Once you manage to diversify away from G7 fixed income and FX, use less leverage, give up using stops and concentrate on the asset classes, trades and time horizons that others don’t venture much into, then I think you’ll find it easier to make more money consistently (although you will have to accept slightly higher volatility).
If you could ask for one wish this New Year it should be for your fund or book to be given the ability to broaden its horizons. Beg your investors or beg your boss.
2008 was the year that really made my reputation as I had forecast the recession (which very few had done) and the financial crisis and managed to produce another year of something like over 100% returns. But I knew then what I say today – when you think your shit smells of roses, you are about to get your face rubbed in it!
New subscribers piled into GMI, wanting to get access to the crazy returns, ignoring the fact that I always said things would be volatile and I that I would not always be right.
I recognised that it was unlikely that I could continue to produce a string of returns as I had done in my first four years of GMI without soon taking a big loss. Here is what I wrote back in January 2009:
There are no investment heroes. Everyone does the best they can. I have had four years of very, very good returns but probability says that I will have a nasty year at some point. It could be this year or it may not be. We can’t tell in advance. All I aim to prove is that consistently, over time, using a decent framework, doing my homework and sticking to a longer-term time horizon, accepting some patches of tricky volatility and not using stop losses, that I will add value and generate decently positive returns. “Over time” is the key phrase. That is not necessarily year in and year out... although that would be nice.
Then 2009 came and my forecast came true. I had the worst year of my career, having made the fatal mistake of overriding my business cycle framework with emotion. I was far too bearish and got KILLED. I think 2009 was down around 50%. Urgh. Subscribers who didn’t understand the long-term game began to drift away. I knew this was coming.
But overall, one down year in five should be considered normal (as was a down, roughly 50% year after a string of +30% to +100% years).
In 2010 I eked out an up-year and started to regain my confidence and in 2011 had a decent year in a tough market. 2012 was a small down year, 2013 was flat and 2014 was very good (probably 40%+). All in all, my first ten years were very good overall with some exceptional years, a few years of chop and a strong finish. Macro markets were really tricky for several years.
In the first ten years, my winning vs losing trades were still around 60% with eight out of ten positive years, which is very good indeed. In 2014 I had also begun to focus on much longer-term themes such as Monsoon and bitcoin, which have continued to evolve as a strategy for me as I think capture even higher returns over time.
The GMI subscriber base had also begun to change significantly: the bank prop desk no longer existed, many macro funds had closed down and multi-strat funds were on the rise. There was a big increase in family offices who soon became the core subscribers of GMI. Family Offices have longer-term time horizons, can take more risk but also must focus on the business cycle to manage those risks. My extended time horizon with the ability to capture big medium-term trades suited them better than most. A lot of well-known hedge fund managers continued to subscribe to GMI but tended to begin to use it more for their personal investments, which were longer-term as opposed to for their funds. Fascinating...
The next decade of GMI began with a great year in 2015 with a big bet on the dollar and bitcoin, and probably produced 20%+ returns overall, 2016 was a small down year (my third in twelve years) and 2017 was another good year with 720% gains in bitcoin and 40% gains in India!
2018 was another exceptional year with a massive bet on bonds coming right at the end of the year (Buy Bonds, Wear Diamonds) while 2019 was flat (I made a lot in bonds and gave back a lot in equities).
Then came 2020 which was my best performance in GMI’s history, coming in at a guestimate of well over 200%! Bonds and crypto ruled the year, along with closing my short equities and credit just at the right time by sticking to my framework.
2021 produced also ridiculously stunning returns at something like over 200% again, this time produced via crypto again as well as carbon.
Over the period of 2019 and 2022, the client base of GMI expanded further into a different type of investor – the high-net-worth investor who is managing their own portfolio.
Family offices and HNW investors have similar risk profiles and time horizons, but the latter have had less experience with financial instruments and risk management so have a steep learning curve to climb.
On looking at performance overall, 2022 has been the second-worst year for GMI, but the main losses have come from giving back a chunk of the gains in the long-term crypto trades, which is expected, but they are still on the whole well up from purchase. I have been clear that although I have a few bets in the long-term book, ETH is by far the biggest for me. I’ve also been trying to use this bear market to build a position in Exponential Age stocks. Generally, I have traded little this year as I didn’t see the big setup.
Overall, I tend not to think of the year-to-year machinations of returns in the long-term portfolio, but mainly when I close out the trade. No one enjoys volatility but it’s part of being a long-term investor. In the past from 2013 to 2017 I held bitcoin through a 500% rise and an 85% fall, eventually closing it out for a 1000% gain.
GMI has had four down years in eighteen, a few flat ones and a lot of incredible years. My winners vs losers still remain above 60%, which amazes me.
I am incredibly proud of what I have achieved at GMI over the years. It has been one hell of a ride. I never thought that my views on time horizon and secular trends would be proven to such an extent.
I am sure I have – without question – the best performance of any research service in history, but it has not been a straight line for sure! And there is never an opportunity to rest on any laurels.
But what I am truly most proud of is the community we have built around GMI.
Nothing exists like GMI. It remains the lynchpin of everything I do and how I think about the world.
Let’s see where the journey takes us next...
One thing I do know, there are big opportunities out there for longer-term investors.
Raoul Pal – CEO, Founder - Global Macro Investor
Julien Bittel – Head of Macro Research - Global Macro Investor
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