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BlackRock's Global Macro Hedge Fund Bets on More Stock Declines

By Malcolm Scott

March 24 (Bloomberg) -- BlackRock Inc.'s global macro fund, the world's second-best performer over two years among hedge funds that invest based on economic trends, is betting against this month's equities rally and buying bonds as a recovery from the worst credit crisis since the Great Depression falters.

BlackRock's A$216 million ($152 million) Asset Allocation Alpha Fund returned 41 percent in 2008, when hedge funds around the world lost a record 19 percent on average. The fund is short U.S. and Australian equities, expecting them to decline, and long U.S., German, Australian, Canadian, and U.K. bonds, said its manager David Hudson.

"The risk is that the economic recovery disappoints in the second half and that equity markets need to revisit their lows in the next few months and maybe go through them," Sydney-based Hudson said in an interview March 20.

The MSCI World Index, which tumbled 42 percent last year, has rallied 21 percent since March 9, boosted in part by the U.S. Federal Reserve's decision to pump money into the economy to get credit flowing. Hudson profited from the declines last year by betting against equities.

BlackRock, which oversees $1.3 trillion, is the biggest publicly traded asset manager in the U.S. Over a third of total assets are managed on behalf of non-U.S. investors, and nearly one-third of its employees are outside the U.S.

Clone Fund

The "overwhelmingly" retail investor base of the Alpha fund helped it avoid the redemptions that beset other Australian-based funds last year, Hudson said. About 35 percent of the offshore money invested in Australian hedge funds was redeemed in the last quarter of 2008, according to Australian Fund Monitors.

The fund, set up in March 2006, uses options and futures contracts to bet on currencies, stocks, bonds, commodities and cash. It gained an average 38 percent over two years. Among hedge funds with at least $20 million in assets, only the $706 million Pivot Global Value Fund performed better with an average 50 percent gain, according to data compiled by Bloomberg on the 363 funds globally with a similar strategy.

In January, BlackRock launched the Global Macro Hedge Fund, a Cayman Island-based fund that is denominated in U.S. dollars and clones the Asset Allocation Alpha fund's trading. The new fund, which is targeting fund of funds, private banks and family offices, has struggled to raise money after the credit crisis battered the appetite for hedge fund offerings.

"The interest has been good, but after a year like last year, a lot of people that would be normally allocating to this kind of fund have liquidity constraints," Hudson said.

The Global Macro fund has raised $12 million. Hudson declined to specify targets for funds under management or the capacity for the funds he manages, except to say it's "a long way north of here."

Currency Bets

The Alpha fund's 41 percent return net of fees was the biggest gain in 2008 among the 214 Australian-based hedge funds monitored by Australian Fund Monitors. The fund is up 1.7 percent this year, according to Bloombergdata. It returned 35 percent in 2007.

The Asset Allocation Alpha fund aims to provide investors with a return of 12 percentage points above the benchmark UBS Australia Bank Bill Index over rolling three-year periods, before fees.

Hudson is now looking at wagering against currencies of nations where central banks are resorting to so-called quantitative easing, where policy makers opt to purchase government bonds to push yields lower. He is considering taking short positions in the Swiss Franc, U.K. pound, U.S. dollar and Japanese yen.

The fund has already taken a position on the expectation the Australian dollar will gain and the Canadian dollar will decline because Canada may be next to introduce quantitative easing measures, while Australia is unlikely to, Hudson said. It remains long gold -- a bet that bullion will go up -- versus the U.S. dollar.

To contact the reporter on this story: Malcolm Scott in Sydney Mscott23@bloomberg.net

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