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The paradox of skill is an important concept to understand for any investor or trader. Managers will often talk about wanting to prove their skills in a competitive environment against the best in the world. Forget that nonsense. You want to be the best in an uncompetitive or less competitive environment. You want to have a strategy that others do not follow. Being in a competitive space may seem like a good thing, but it will be harder to beat others. If there is a fixed amount of alpha, everyone will be fighting for that same alpha and it will be harder to win your share when the market is more competitive.

There are good times to invest in global macro and managed futures on a tactical level and there are other periods when the investment decision should be made on a strategic level. There are conditions when divergent strategies which are highly uncorrelated to core risky assets such as equities will do better. Unfortunately, there is not a lot of data for those periods of very strong managed futures performance. For example, crises like recessions are good periods. We also believe that periods of large deviations from fair value for an assets class will be global macro and managed futures friendly.

The US recession probability model based on the Treasury spread is a simple straightforward forecasting tool that can be followed in real time. If the spread term negative, watch out, economic winter is coming. Nevertheless, there are only a limited number of recessions and a limited number of signals. What is as useful is watching how the probability of a recession changes during non-recession periods. Periods of growing economic stress will see an increase in recession probability. For example, periods when the probability is more than 10% or even more than 5% will be times when equity markets will be under stress. These periods may pass without a recession, but there will be an impact on financial markets. This signal may have to be confirmed with other data since it provides early warnings, but it is valuable as a simple indicator.

Reading some of the recent comments by central banks there seem to be three emerging themes over the last few months.

Eichengreen is one of the leading international monetary economists and historians. He has always been especially effective at describing and analyzing the global monetary framework across time. When I look at the international monetary system on these four dimensions, I find that we lacking coherence or policies that will affectively raising global growth. Consequently, the longer-term story of secular stagnation or just a lower global growth path will continue to hold. Changes in these dimensions will be necessary to change the slow growth story. Our current views are not positive:

What separates global macro investing from other hedge fund styles? This style is significantly different from others because it has a broad focus on a wide range of asset classes. It is not just equity or fixed income focused. Its search for opportunities goes beyond any single country.

Managed futures strategies can be described in a number of different ways. Many researchers and market practitioners have referred to it as a long volatility strategy. This language has captured many as a good shorthand description. In the same vein but much more clearly developed, it has been called being long a straddle. A straddle is volatility sensitivity with its gains occurring only after prices move outside the strikes plus premium. Empirical research has shown that the long straddle is a good representation.

The major themes for September have not changed significantly from last month. The reason is simple. The markets have not moved much and the economic information that we have received in the last month has not changed expectations. The two big events were the Jackson Hole conference which provided little new light on Fed behavior and the confirm payroll last week which rolled back some of the real economic enthusiasm.

2016 is a year is turning out to be special for relative value hedge funds focused on distressed and event driven strategies. These two along with special situations, equity market direction, and convertible arbitrage moved to be the August winner. The losers for the month were fundamental growth and systematic CTA’s. Both these strategies need movement in economic or firm-specific fundamentals which just did not occur for the month. Relative to the flat equity and fixed income markets, August performance for hedge funds was at best fair.