Politics make its mark for hedgies

Over the last five years there have been numerous shifts in strategy by hedge fund managers but there is a two-fold characteristic that has yet to come to the fore, best represented as a test: does your  manager find the Eurozone crisis boring?

This is not a hard test to fail. Seemingly, the only prerequisite of being a macro manager is whether you can guess the next move of whoever is holding the baton, whether that’s Merkel, Hollande or whoever the Greek prime minister is at the moment.

Markets are more correlated than ever, but not only that, they are correlated to the voice of our dear leaders. Hedge funds took a hammering in 2011, many because they misjudged whether micro calls would drown out the macro noise from Europe.

Long term value investors often pride themselves on their ability to root out undervalued companies while openly admitting that they are completely useless at ‘timing the market’. Soon enough this phrase will be revised to reflect that they are useless at timing European politics.

Undoubtedly, things will be a little out of control if we miss Apple’s profits report because we were watching elections in Belarus, but the point is valid whether you like it or not, politics – the shallow party kind – are here to stay.

Akin to currency overlays during some of the wild swings over recent years, we could see a larger and larger proportion of capital protection, or even alpha, come from political, let alone macro, overlay.

With this we could see a changing demographic in the hedge fund world; consultants more familiar with Whitehall than Lombard Street may become the vital player in a portfolio manager’s team. The human aspect of trading, that we all thought was disappearing, may be coming back, just not quite how we thought it would.

As the 1996 Skunk Anasie hit goes, ‘Yes, it’s fucking political’.