Cash is back… as a tailwind for global macro

Key takeaways

• The US Federal Reserve’s 2022 hiking campaign has changed the investment landscape. With policy rates above 5%, cash now offers a meaningful nominal risk-free return. 
• This has important portfolio construction consequences and alters what investors should expect from liquid alternatives with “cash plus” return targets. 
• We explain how higher cash yields mechanically raise the total expected returns for global macro funds like the BlackRock Tactical Opportunities Fund.

What role does cash play in the Tactical Opportunities Fund?

Global macro is an investment style that seeks opportunities across asset classes and geographies. We establish long and short country-level exposures in stocks, bonds, and currencies based on divergences in market pricing of macro fundamentals like growth, inflation, and policy.

We implement our active views with derivatives such as equity index futures, sovereign bonds futures, and interest rate swaps. These allow us to gain the desired country-level exposures and have several other benefits: First, these derivatives are cheap to trade and highly liquid. Second, they are capital efficient because they can be bought and sold with a low amount of margin. For example, if we want to establish a 10% long exposure in US Treasuries via sovereign bond futures, we need only post 0.2% of capital at the exchange. A 5% short exposure to Japanese equity index futures would require us to post 0.5%. This means that we are able to express active views while also maintaining most of the capital in the fund in instruments that earn the cash yield. In other words, we capture and compound US cash rates on ~95% of the capital in the fund, and then seek to add diversifying alpha on top of that. From a portfolio management perspective, this is exactly the same whether cash earns 0% or 5% — the only difference is the expected total return.

After a decade near zero, cash yields are back to their 1990s averages

What do higher cash rates mean for Tactical Opportunities?

Higher cash yields should directly translate to higher total expected returns for strategies with “cash plus” objectives. In the 7+ years that we have managed the Tactical Opportunities Fund, we’ve observed that dynamic of total returns shifting higher and lower with the level of cash yields.

The use of derivatives that we described for Tactical Opportunities is a somewhat unique feature of the global macro category. Other liquid alternative approaches tend to use derivatives less extensively, so the effect of higher cash yields on total returns for those categories is less impactful.

For example, strategies that take active positions in physical securities like single-name stocks or bonds typically need to move capital to buy and sell those exposures. That leaves them with less direct exposure to short-dated cash yields. Net exposure to cash instruments is part of the explanation for the difference in total historical returns across different alternatives categories in the chart below. By zooming in on the 12 months following each Fed hiking cycle, we effectively focus on the historical periods with the highest US cash yields.

Are there other benefits of this environment for your strategy and the global macro category?

Yes. In addition to the mechanical return uplift from higher cash yields, we see associated shifts across markets that are advantageous for macro alpha.

Higher cash yields in the US today are a direct consequence of elevated inflation and the shifts to the Fed’s monetary policy stance. However, the macro backdrop in Europe and Asia aren’t the same as the US. As we look across the globe, we see a greater amount of macro and policy dispersion across countries. This creates divergences in prices and opportunities to generate alpha through both long and short country positions.

The historical evidence of high cash yield periods benefitting global macro alpha opportunities is also embedded in the chart below. Like today, these are periods of high macro uncertainty. The returns for the global macro category stand out in comparison to other alternatives categories, and also relative to traditional stock, bond, or cash investments.

Many investors have been lured into cash in 2023. While cash now offers a higher yield compared to the recent past, over the medium-term high cash holdings are associated with an erosion of inflation-adjusted purchasing power. Global macro funds like Tactical Opportunities offer investors the ability to compound attractive cash rates while also staying invested in diversifying sources of excess returns.

Global macro funds have stood out when cash yields are high
Average performance in 12 months following last five Fed hiking cycles

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