by Vikas Kapoor, Head—AB Hedge Fund Solutions, Sharat Kotikalpudi, Director of Quantitative Research—Multi-Asset Solutions, AllianceBernstein
Trend-following may struggle in range-bound markets, but it’s not the only macro approach.
Macro investing is a cornerstone of the hedge-fund industry. With some $1.3 trillion in assets under management, macro strategies encompass a wide array of investments across asset classes and geographies designed to provide diversification beyond stocks and bonds.
But the category is a broad one, and diversification within it is equally important—particularly in today’s uncertain market environment. The universe can be divided into two buckets: directional strategies and relative-value strategies. We believe there’s a strong case for investors to include both types in their allocations.
Trend-following, the most common directional macro subcategory, seeks to capitalize on sustained price movements. The assumption is that trends often persist because it takes time for markets to fully reflect changes in macroeconomic conditions.
Relative-value strategies focus on exploiting pricing inefficiencies within related assets, such as equities, interest rates and commodities. They do this by relying on signals like price convergence rather than by following a trend.
The way we see it, an allocation to both macro approaches has the potential to generate higher returns with similar levels of volatility to investing in either one on its own and greater potential downside mitigation.
Regime Shift? Or Temporary Disruption?
The relative-value approach is well-established among equity investors, but when it comes to macro strategies, directional approaches typically dominate.
Nearly all macro managers have an allocation to trend strategies, and for good reason. Trend strategies have performed well during market “regime shifts,” which typically trigger prolonged equity market sell-offs and start new trends. The 2008 housing market collapse that sparked the global financial crisis and the era of zero interest rates that followed is a good example. A more recent shift was the 2022 surge in inflation and interest rates that in retrospect closed the book on the post-crisis period of rock-bottom rates and ample liquidity.
Over time, trend strategies have helped to insulate hedge-fund allocations in sustained equity market downturns, often providing positive returns.
But there’s a catch: These strategies can be less effective when markets lack clear direction. That’s important, because regime shifts are rare. Most shocks are idiosyncratic, typically sparking a brief period of poor risk asset performance, followed by a rebound.
For instance, markets swooned after the Trump administration announced sweeping tariffs in early April, but then rebounded sharply when the White House paused their implementation and began negotiating with trading partners. Asset prices traced similar patterns over the first month of the COVID-19 pandemic in early 2020 and during a short-lived US regional banking crisis in 2023. Likewise, there were sharp moves in the SG Trend Index, which follows the performance of large trend-following strategies (Display).
Trend strategies struggled in these conditions—in market parlance, they were “whipsawed.” The experience was much the same as during the preceding decade, when quantitative easing and the Federal Reserve’s willingness to support markets in downturns fed a series of sudden selloffs and rapid recoveries.
We think current policy and macro uncertainty may again create similar “whipsaw” conditions that could cause sharp swings in security prices.
Relative-Value Macro: A Different Approach
Relative-value macro works differently from trend macro. It emphasizes diversification, which may help to insulate investor portfolios when bouts of volatility are themselves volatile—periods known among hedge-fund investors as “high vol of vol” environments.
Relative-value strategies exploit inefficient pricing among related assets, rather than trying to predict market direction. To do this, they monitor signals and take long/short positions across diverse asset classes and geographies. Unlike trend and other directional macro strategies, relative-value positions are typically balanced to minimize the strategy’s directional exposure, making them less susceptible to rapid market shifts.
While these strategies may struggle during regime shifts compared with trend-following approaches, they’ve demonstrated strong relative performance during periods of uncertain markets without clear direction. This distinctive behavior may help insulate investors’ portfolios.
Two Strategies May Be Better than One
We’ve found that combining both approaches has the potential to strengthen downside mitigation while also adding to upside potential during positive periods. For investors, that could add up to a higher potential return with a similar level of volatility.
Put another way: Trend-following endures challenging periods, and trying to time the market and switch from trend to relative value in real time is difficult. As we see it, the best solution involves embracing a strategic allocation to both, rather than relying on one.
As the global economic landscape continues to evolve, it may be time for investors to reconsider the advantages of relative-value macro strategies in their pursuit of consistent and sustainable returns.
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