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Alternative Market Briefing

The Big Picture: The age of global macro is back

Tuesday, May 31, 2022

amb
Jacques Lemoisson
B. G., Opalesque Geneva for New Managers:

GATE Capital Management is a Geneva-based global macro quantamental investment company founded in 2021, currently in the process of acquiring a FINMA license, with a staff of four. The mother company GATE Advisory was founded in 2020. Gate Capital is preparing to launch a pure global macro fund this year.

According to the founder, Jacques Lemoisson, now is the time for global macro strategies; it is the beginning of an era, he says. In this interview, Lemoisson describes GATE's strategies as well as his global macro outlook.


Opalesque: What strategies do you run at GATE?

Jacques Lemoisson: We advise two strategies with our DRIVE module (Dynamic Risk Investment Value Engine), one that invests in US infrastructure and one that invests in China's decarbonization. We may be the only manager to offer this kind of themes on China's A-shares. The strategies are long-only, with a global macro hedging process on top of the thematic investing (aka DRIVE). With these strategies, we are somewhere between a standard asset manager and a hedge fund.

Furthermore, we run a global macro strategy called GTO (Global Tactical Opportunities). I have been managing it with my own money for 10 years.

This year, our goal is to launch the GTO through a Cayman fund with seeding from family offices and institutional investors. The pro-forma returns on the existing personal managed account are 26% YTD as of last week. The average yearly return has been 8.8% since inception.

Opalesque: What is your background?

J.L.: I started my career as an aeronautics engineer and started working in finance in 1995 during the bond market crisis when I advised treasury departments, banks, asset managers, and institutional investors. I worked at JP Morgan Securities from 2000. Then I came to Switzerland and managed an advisory desk at Lombard Odier. I also write a daily newsletter called Global Macro Insight, which is sent to institutional investors, including two central banks.

During the pandemic, I decided to create my own company as I realised the central banks would stop their quantitative easing and geopolitics would be back on the table - a period not unlike the 1970s.

Opalesque: Why is now the time for global macro?

J.L.: Global macro and geopolitics are my specialties. In my view, the last 10 years have seen a lot of "monkey trading" (*). Since 2009, all asset classes have recorded positive returns - except for commodities.

Now is the time for something new. I designed a unique environment that avoids long-only process bias, adopts a global macro approach, and mixes top-down and bottom-up investing. When we see an interesting theme, we call it - although we are not a thematic boutique at this stage, we are a global macro boutique.

Opalesque: What is missing from efficient asset allocation?

J.L.: Two things are missing from efficient asset allocation in general and mainly in Europe at this stage, and that is what I want to tackle.

Firstly, there is a lack of exposure in China and alternative investments, i.e. hedge funds. Institutional investors and family offices invest mainly in private equity. But the problem with PE is that it carries liquidity risk; the expected return is only realized when you exit. When a recession or stagflation comes, the IRR promised before the exit becomes uncertain.

Secondly, institutionals and FOs are stuck with long-only or other crowded trades, such as indices. All index providers replicate the same strategies, putting the same big names on top of their selection. Now, we have a contingent effect, while liquidity in financial markets is at a record low.

Opalesque: What is the essence of GTO?

J.L.: The essence of the GTO is to be uncorrelated to global markets. In the GTO structure, the bets are all equally weighted to avoid the misconstruction of the current indices.

Many indices have only a few names at ~10%, which means they have a small portion of the selection running the performance. It is terrific when the stocks are up. But it is also symmetric, which means when they have a drawdown, losses are maximized. We adopt an equally-weighted structure to avoid that. All our themes are also equally-weighted, even China's.

We use tactical (from one day to three months) and strategic bets (from three months to one year). We invest across all asset classes. Up until now, we have used ETFs. In the fund, we will use more derivatives for better accuracy.

Opalesque: What about the pure global-macro aspect?

J.L.: The second distinction about the GTO is that it is pure global-macro. Plenty of hedge funds claim they are global macro. Still, when you look at their process, you see only traders doing some arbitrage across asset classes or within an asset class, with an asset allocator diversifying the risks. The real global macro does not consist in managing arbitrage between milk in New Zealand and orange juice in California with a carry trade.

Our approach to global macro can be qualified as "old-fashioned". The real essence of global macro looks at what is currently running the world. Why have the central banks stopped playing? What will be the consequences on asset classes and the economy? The global macro manager must be able to answer these questions.

Opalesque: How would you navigate a recession?

J.L.: If there is to be one, a recession will be a consequence of something. I am more interested in finding the initiator or the catalyst of the recession and then the effects, rather than the other way around. Valuation, for example, should be considered at the end of an investment process, not at the beginning. We create alpha when we catch the source of the movement.

When it comes to predicting a recession, we must define the type of inflation and the central banks' reactions. Then we will see if we move to stagflation or recession.

Opalesque: What about inflation?

J.L.: The critical thing to remember is that the current inflation is not transitory, because all commodities are valuable. The regime will be higher than the central banks are betting on or communicating.

There are three reasons for this: (1) the cycle of low valuation and low value of commodity prices has just finished; (2) during the covid pandemic, many analysts pushed the idea that we are in a virtual world, which is wrong; (3) the next revolution will be industrial.

The central banks are already laggard and will be late in the cycle to hike rates or run off their balance sheets. They will have to compensate for these delays. Only the forex and the bond markets realize this. We will have to manage higher prices, lower margins, and high corporate valuations.

With the combination of non-transitory inflation, the current regime being higher than expected, the squeeze in margins, and central banks becoming more restrictive than expected, we could go to, at best, stagflation, at worst, recession.

To navigate the current environment (high inflation, high inventories, high Capex, but Central banks' balance sheet runoff and weaker consumption), you need to play any back-to-the mean in equities and bonds, arbitrage between credit spreads, bet on higher priced-commodities, on China, and the strength of the dollar and the yuan.


***


(*) In 1973, Princeton University professor Burton Malkiel claimed in his bestselling book, A Random Walk Down Wall Street, that "A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts." The question of whether monkeys could do the job of financial analysts was picked up by the Wall Street Journal. Its "Dartboard contest" ran as a feature for 14 years. This proved insufficient to settle the competition between man and monkey's investment prowess.




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