O’Brien Investment Group LLC -Discretionary GM
While alternative investment strategies endeavor to produce absolute returns—meaning they are not dependent on broad equity market beta—most alternative managers will acknowledge that there are better and worse environments for their strategies.
Just ask systematic trend followers how the post credit crisis environment of the last decade has been for them.
“It is probably the best time to be a global macro trader.”
The current market and geopolitical environment seems to be tailor made for global macro traders. “It is probably the best time to be a global macro trader,” says Monica Fuentes, portfolio managers for the O’Brien Investment Group (OBIG) Discretionary Global Macro Futures Program. “I can only compare it to 2008—not because we expect a crisis, but because 2008 was a very macro driven environment, it was very exciting, there was a lot going on.”
The OBIG Global Macro Futures Program is a discretionary strategy that opportunistically seeks event-driven trades, thematic trades and trades based on valuations relative to the macro environment. Fuentes joined OBIG in late 2015 to build out the trading, risk management, operations and support to launch the OBIG strategy in the first half of 2017. Fuentes was previously a portfolio manager with London based COMAC Capital, a $6 billion global macro manager. Prior to that, Fuentes spent eight years at Goldman Sachs with their strategy and macro proprietary trading teams in London and New York. She received a Ph.D. in Economics from Columbia University in 2003.
The program is purely discretionary.
“We make decisions based on the policy and geopolitical events that we expect to playout over the next one to three months.”
“We look at what is the market positioning, what is the sentiment, and if there is asymmetry, we get in,” she says.
Fuentes views the current environment with multiple significant global macro drivers as a target rich environment, but by no means is it a layup.
“It is an environment that you are going to be able to monetize if you are open-minded,” Fuentes says. “If you have fixated views on how financial markets will play out, it is going to be a difficult environment.”
While Fuentes tends to focus on the longer-term outlook, she acknowledges that the current environment requires more flexibility. “You see a tendency in the market right now for people to forecast what is going to happen a year out, the short-term—next one to three months—is so important to see how the one-year outlook will look like. Unless you get right the next month or two months, you are not going to be able to get right the next year out.
”Key to the current environment is the U.S.-China trade negotiations, which is not as binary as it is being described. “I don’t think we have ever been in a time sosensitive to events as this one.”
“Consider there is a trade deal—the U.S. economy is going to perform in a certain way; the Chinese economy is going to perform in a certain way—what happens if there is no trade deal? It will be a very different outcome. And what happens if there is a deal and someone breaks it after three months and the penalties that are part of the deal kick in?” Fuentes asks. “It is a very fluid environment. I don’t think we have ever been in a time so sensitive to events as this one. In fact, we are of the view that monetary policy matters a lot less. We would say that we doubt the Fed is going to engage in an activity where they are going to impair the economy.”
The latter point is a key differentiator of Fuentes with the broader global macro space. While many traders have been laser-focused on central bank activity, Fuentes believes central banks have had lesser influence on markets over the last couple of years.
“That has been true in the last 2.5 years,” she says. “If I told you Fed would raise rates to 2.5%, no other major central bank would raise rates, and the Fed would unwind $600 billion of paper, 99% of people would have said you don’t know what you are talking about, everything is going to blow up.”
It didn’t. And this is why Fuentes believes monetary policy is no longer a major driver of markets. In fact she lists it as fifth in order of importance.
Fuentes unique approach goes beyond her view of the impact of the Fed and central banks. Her current portfolio doesn’t look like a typical global macro manager.
“Commodities went from being a specific sector to a very macro one … Ags became not just ags, they have become as macro as they come.”
“There is one sector in particular that we have been watching closely, ags,” Fuentes says. “Anything positive that comes out of the U.S.-China trade negotiations will have a positive effect on ags. Even if there is just a memorandum of understanding, it will be positive for ags. Brazil doesn’t have enough soybeans to cover Chinese demand.”
Fuentes is also bullish hogs. “We have been carrying a long position in hogs since early February. Why? China culled close to one million pigs after 100 outbreaks of swine fever. China will have to replenish their hog stocks,” she says. “Commodities went from being a specific sector to a very macro one. When you are talking about US-China negotiations, you are deciding how much soybeans are they going to commit to buy, how much corn are they going to commit to buy [and] how many hogs are they going to commit to buy. Ags became not just ags, they have become as macro as they come. “
Key to Fuentes approach is reading global events. “[Because we follow them so closely], we have a very good understanding of geopolitical events and [their influence on markets],” Fuentes says. “That is probably one of the most overlooked things today in financial markets.”
She cites the U.S. decision to pull out of the Iran deal. At the time, most analysts expected the oil market to experience a supply squeeze, and hence a price spike, as a result of less Iranian crude on the market.
“Our view was that there [was] plenty of crude oil production globally, [and] that the response geopolitically was going to be managed with a lot more diplomacy than the markets were giving credit for,” Fuentes says.
Her view turned out to be the correct one. This was demonstrated by the proprietary performance of the strategy in 2016 when it earned more than 10%.
“Our best trades in 2016 were at the time of Brexit when there was asymmetry,” Fuentes says. “Right now, with regards to Brexit, you are in political territory that changes by the hour. Yes they are going to vote, no its not going to be a close vote; yes there is going to be an extension, no there is not going to be an extension. You might get it right, you might not, it is like rolling the dice. No edge to monetize. Whereas in the summer of 2016 we were confident, this is an outcome that the market is mispricing.”
Not only did Fuentes’ correct reading of British politics lead to success, but it cemented her conservative approach. “The Brexit event has shaped me as who I am as a portfolio manager,” she says. “When I saw the sterling collapse 10% over the space of six hours in the middle of the night, I took note. That is why you see our margin to equity so conservative because we have entered an environment where anything is possible. Any price move is possible.”
This makes it a great time to be a global macro trader.
