Real Talk with Borut Miklavcic: Macro With An Edge

Jan 23 2018 | 4:31pm ET

FinAlternatives Q&A with Borut Miklavcic, Chief Investment Officer and Managing Partner of LindenGrove Capital LLP

FinAlts: You started LindenGrove five years ago with a core team from Nomura. Can you tell me about your background and why you wanted to start this business?

Miklavcic: My vision for LindenGrove was to build a team with multiple risk takers who are uncorrelated to each other and who are specialized in such a way that we could benefit from knowledge sharing as well as strategy diversification.  The aim was to dynamically allocate capital across portfolio managers recognizing that in different environments, some strategies work better than others. 

After running the global inflation desk at Lehman Brothers from 2002 up through the bankruptcy in 2008, I was prepared to lay the groundwork for what would become LindenGrove. I was looking to broaden my experience and proposed setting up a proprietary trading group at Nomura. My plan at the outset was to build a track record for the group and spin out into a hedge fund focused on both directional and relative value opportunities in liquid markets and strategies.

After three years of running that strategy at Nomura, the core part of the team left to start LindenGrove, utilizing much of the same framework and investment process we had developed at Nomura. 

FinAlts: You describe yourself as a discretionary global macro strategy with expertise in inflation. Can you tell me more about that and how it differentiates you from other global macro funds.

Miklavcic: I think we differentiate ourselves in two main ways.

The first, as your question alludes to, is our focus on inflation. Trading of inflation linked securities represents a significant proportion of our overall risk budget, which is pretty unusual for most macro funds. We also look to leverage our inflation expertise into a broader understanding of macroeconomic trends and trading opportunities, which we believe provides us with an extra edge.

The second source of differentiation is our attention to trade structuring. While a successful macro strategy relies on making the right market calls, it is the way you structure those calls that determines the consistency and asymmetry of your returns, as well as your maximum drawdowns and ability to hold a trade to its crystallization.

FinAlts: Inflation has not been a concern during the past few years; in fact there have been more questions about why inflation isn’t rearing its head. What are your thoughts on why that is and how it will be perceived and/or change going forward?

Miklavcic: The fact that inflation has been low globally should not come as surprise given that in many major economies output gaps have only recently started to close.

The major surprise of 2017 was the drop in U.S. inflation, where we would have expected low unemployment rates and a mature recovery to start pushing inflation higher. We have done a lot of analysis of the underlying U.S. inflation data and are confident that 2017 presents a statistical aberration. In recent months we have seen monthly inflation data return to its underlying trend and we expect that to continue.

On the other hand, we do not expect a rapid acceleration in the inflation rate anytime soon. Inflation has been structurally low for a very long time, some of which was masked by rapid rises in medical and education costs during the previous decade. Those rises are unlikely to be repeated.

Unless we observe a significant pick up in wages, a materially higher inflation rate seems off the table for now.

FinAlts: Now that we appear to be in an environment with rising interest rates, what impact do you think that will have on the strategy and other markets?

Miklavcic: The Federal Reserve has been normalizing rates for some time, and until recently, it was practically alone in this respect. As other major central banks begin their gradual exits from extreme monetary policy settings, we expect the opportunity set for macro strategies to expand.

Volatility is starting to return to some interest rate markets that have been in a deep freeze for a long time. We think that will continue, as it gives macro focused investors more to trade. It is also creating new opportunities in the forex markets.

In terms of the broader market, there has been very little impact so far. Financial conditions have continued to ease as the economic recovery has gathered pace, while central bank balance sheets continued to expand. The year 2018 could prove a watershed moment, as central bank balance sheets are expected to start contracting in the latter part of the year, and the consequences of that on economic performance, asset prices, and volatility are largely unknown.

While the timing is highly uncertain, our baseline assumption is that such a change will portend a rise in volatilities and an expansion of risk premia across asset classes - trends that should benefit active investing and macro strategies in particular.

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