Opportunities for macro hedge funds are best for many years
Financial Times (FT) By Kenneth Tropin February 27, 2025
Kenneth Tropin is founder and chairman of Graham Capital Management and chairman of the Robin Hood Foundation
To understand why macro investing is now on the mind of many investors, it makes sense to spend a moment reflecting on the history of this strategy. In the eighties, at more or less the start of the hedge fund industry, the most prominent managers were legendary discretionary macro traders like Paul Tudor Jones, Louis Bacon, Bruce Kovner, and Stan Druckenmiller. Their returns were terrific and they had low correlation to beta, or the overall market trend. In my opinion, that’s why they were called hedge funds.
The industry gradually evolved into many diverse sectors of the markets and by the late nineties, “long-short” equity funds were the dominant style in the industry. While most of these funds were characterised by having both long and short positions that bet on both price rises and falls, their returns were pretty correlated to the equity markets. This reflected what was typically a residual net long exposure. Over the subsequent two decades the hedge fund industry has become quite complex, and many different styles have become successful.
Perhaps the most notable today are multi-strategy funds, which tend to be extraordinarily diversified. They have largely offered excellent and consistent performance, making them popular. Heading into 2025, however, there is a renewed attention on the macro strategies like the ones my firm has focused on since it was founded in 1994.
There are many reasons for this, not the least of which is how incredibly interesting the trading environment is — a stark contrast to the muted opportunities from 2010 to 2021. That era of cheap money was a great period for equities but the opportunities for macro strategies are better in a higher volatility environment.
Perhaps the most telling factor in this regard was global monetary policy, which was more or less on hold for the decade before the pandemic. Consider that between 2010 and 2019 there were only 13 rate hikes of 0.25 percentage points (equivalent) between the Federal Reserve, the European Central Bank and the Bank of England. In contrast, those three banks delivered roughly 60 0.25 percentage point rate hike equivalents between 2021 and 2023 and have already delivered 12 rate cuts of 0.25 percentage points (equivalent) since the second quarter of last year. So, if you’re a fixed income trader, the opportunity set has increased immensely. Importantly, other macro markets have also been interesting with elevated volatility in currencies, commodities and equities.
Looking ahead, I see the markets continuing to be very constructive for macro. First of all, we need to focus on how radically different the policies of the Trump administration are to those of the Biden years. In general, we know that Donald Trump is likely to be pro-business — he wants to deregulate, focus on immigration, cut taxes, impose tariffs. But all of these policy aims are disruptive to the previous status quo, and are in my opinion, very likely to keep volatility higher across asset classes.
In addition, global economies are diverging, a positive factor for potential trading opportunities. The geopolitical backdrop is also very uncertain, which is likely to contribute to volatility and market uncertainty.
In my view, this is an unusually risky moment in time for investors. The US debt burden continues to grow and for now, the market is ignoring the magnitude of the problem.
Cyclically-adjusted equity valuations in the US are near the highest levels since the dotcom bubble and the concentration risk in the S&P 500 is unprecedented in modern times, with the top 10 stocks representing about 30 to 35 per cent of the Index’s capitalisation. This is largely a huge bet on AI. I can understand the rationale for this but it is very risky.
When I look at the US bond market, I am also concerned for two reasons: Obviously, the budget deficit, but also there is very little term-premium in the market for taking the risk of holding longer-term debt. Further, if the tariffs that Trump has proposed are in fact implemented, this will potentially spur an increase in inflation.
When I speak to institutional investors, they are increasingly concerned about how to better manage downside risk. Understandably, they are now looking at specific hedge fund styles that are the least correlated to beta.
Macro has historically had this key attribute. I believe this is the best opportunity set we have seen in many years for macro. While there is, of course, never a certainty that macro managers like my firm will get all the moves right, it is also hard to imagine the markets we trade will become boring anytime soon.
Kenneth G. Tropin is the Chairman and the founder of Graham Capital Management, L.P. (“Graham”). Mr. Tropin founded Graham in 1994 and over the last 30 years has grown the firm into an industry leading alternative investment manager focusing on global macro discretionary and quantitative hedge fund strategies. Mr. Tropin is currently the Chairman of the firm’s Executive and Investment Committees and a member of the firm’s Risk Committee. Additionally, Mr. Tropin is responsible for managing the strategic investment of the firm’s proprietary capital. Prior to founding Graham, Mr. Tropin had significant experience in the alternative investment industry, including five years (1989 to 1993) as President and Chief Executive Officer of John W. Henry & Company, Inc. and seven years (1982 to 1989) as Senior Vice President and Director of Managed Futures at Dean Witter Reynolds. Mr. Tropin has also served as Chairman of the Managed Funds Association and its predecessor organization, which he was instrumental in founding during the 1980s.
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