As dumbfounded traders struggled to find some one – or some thing – to blame back in October as the market rout that today saw the Nasdaq drop into bear market territory and the 2s10s curve compress to single digits, one legendary hedge fund manager stammered out an explanation that has since been seized upon by market commentators of all stripes (and at least one increasingly anxious Treasury Secretary): The goddamn machines are at it again.
And with stocks once again ‘overreacting’ (according to Steven Mnuchin, the aforementioned Treasury Secretary, whose jawboning was promptly ignored) to a moderately dovish Fed statement and presser, it’s worth resurfacing comments made earlier this week by Stanley Druckenmiller, the legendary macro trader who first made his name off the legendary ‘Black Wednesday’ pound short, while he was working for George Soros.
George Soros
Druckenmiller’s skill at recognizing market signals helped his since-shuttered hedge fund Duquesne Capital predict four of the last four recessions and wrack up a legendary streak of market-dominating gains. But repeating such a feat today would be almost impossible (for him, at least), Druckenmiller said, because the volatility that we’re seeing today isn’t routed in technicals or fundamentals. Instead, a lot of it is “noise” generated by trend-following algos and quant strategies that simply distort market moves beyond recognition.
“I made 30 percent a year for 30 years,” Druckenmiller said. “Now, we aren’t even in the same zip code, much less the same state,” he quipped of his recent returns in an interview with Bloomberg Television.”
While secular trends have largely remained intact, short-fluctuations that used to “mean something” are now just…noise.
“I think the message over eight or nine months is still great,” said Druckenmiller, who converted his hedge fund to a family office after closing Duquesne Capital Management in 2010. “I just think over a week or two, you’re getting noise that used to mean something, and now it doesn’t mean anything.”
That’s a problem, because while hedge funds should welcome volatility (because, if nothing else, it offers “entry points” for a trade), instead, the volatility we’re seeing today has become “a nightmare” (hedge funds have suffered serious losses over the past two months while more LPs pull their money, having apparently grown tired for paying for the privilege of underperformance).
“Volatility is only good if it’s part of the trend and it’s giving you entry points within a trend,” he said. “When you’re going up and down, but there’s no real trend, that’s a nightmare. You might think that a volatility move is the beginning of a trend and get yourself whipsawed.”
“I’m not surprised at all by the hedge funds not doing well,” Druckenmiller said. In the future, “there’s probably going to be 10 to 20 of them that are great,” and the rest shouldn’t be charging traditionally high fees.
To make money today, Druckenmiller says, investors must exercise incredible emotional control.
“I’ve never made a buy at a low that I didn’t just feel terrible and scared to death making it,” he said.
As fate would have it, a Bloomberg story published late Wednesday revealed that Soros Fund Management, Druckenmiller’s old firm, has sharply reduced allocations to its macro traders, cutting back on the strategy that made Soros a billionaire in the first place – and inspired a generation of macro-focused traders. SFM CIO Dawn Fitzpatrick, who joined the fund early last year, has been slowly making these cutbacks since the beginning of 2018 due to “fewer opportunities”. And she has accomplished this by withdrawing money from external macro managers and cutting the allocation to the firm’s internal macro team.
Performance has apparently justified the retrenchment: Soros’ macro team has lost between 4% and 5% this year, though the firm has remained in the green more broadly.
Adam Fisher, who is Soros’s director of macro and real estate, now has an allocation to macro investments of about $500 million, said the people, down from about $3 billion last year. The amount could be increased in the future if conditions improve, one of the people said.
At Soros, the macro team lost between 4 and 5 percent this year, while the firm on the whole is up slightly, according to the people. This month, Soros cut several members of its macro staff, including Nuno Camara, who managed money in emerging markets, and Timothy Durnan, a macro trader. The two men couldn’t be reached for comment.
And with Cooperman appearing on CNBC Thursday afternoon and once again railed against HFT and algos, it’s worth asking: Will ‘blame the machines’ become the new ‘blame the Fed?’
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