When a fund is said to be basing its potential investment returns on a global macro strategy, they adapt a well-known hedge-fund style that made billionaire investor George Soros famous – which are nothing but well-educated guesses about the macroeconomic developments of the world.
Basing potential investment returns on a global macro strategy means nothing but basing well-educated guesses on the macroeconomic developments of the world.
They seek to profit from large-scale economic and political shifts by placing bets on interest rates and bond yields.
It is based on the interpretation and prediction of large-scale events related to national economies, history, and international relations, otherwise known as global macro trading strategies.
As traders, macro hedge-fund managers like to get in early to catch a key trend or investment idea and then tend to exit before a market finally turns; that is, shoots up or down in value by a substantial margin.
In 1997, global macro traders were again able to capitalise on market volatility by shorting many of the Asian currencies in the lead up to and aftermath of the Asian Monetary Crisis and subsequent de-valuing of currencies such as the Thai Baht and Indonesian Rupiah.
Macro events often occur as fundamental changes in global economies, typically brought about by shifts in government economic policies, political climates or interest rates which impact all financial markets.
So, macro investing is a hedge fund or mutual fund strategy that bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles.
Holdings include long and short positions in equities, fixed income, currency, commodities, and futures markets.
The long-term historical record suggests that many of these funds have delivered astonishing returns. For instance, Soros’s Quantum Fund returned 30 per cent per year between 1968 and 2000.
But not all macro trades have been quite so successful. Back in 1994 for instance many managers incurred large losses when they made huge, unhedged bets that European interest rates would decline, causing bonds to rise.
What happened was that the Federal Reserve raised interest rates in the US, pushing up euro interest rates!
Macro investing, most popular hedge fund strategy
Macro investing is perhaps the most publicised of hedge fund strategies, due in no small part to the big headlines generated by managers such as Soros.
Not surprisingly however, macro investing is perceived by many to be a risky and a highly volatile investment strategy.
For example, if a manager believes the Britain is headed into a recession, he may short sell stocks and futures contracts on major UK indices or the British pound.
The strategy typically employs forecasts and analysis of interest rate trends, international trade and other broad factors
The manager may also see a big opportunity for growth in Singapore, taking long positions in that country's assets.
The strategy typically employs forecasts and analysis of interest rate trends, international trade and payments, political changes, government policies, inter-government relations, and other broad factors.
Global macro fund managers focus primarily on the risk side of trading.
For macro traders and managers, the primary element in decision-making is risk, because when investing in such a speculative world there are so many risk factors and moving data points that they must take into account.
Macro traders are not fundamentalists; they rely on risk management and staying liquid to avoid a liquidity crisis.
In 2007 and 2008, with the credit bubble where there was a long period of high volatility and illiquidity, many global macro funds found themselves with liquidity problems.
It is the most flexible type of global macro fund in which fund managers may use all types of assets. This portfolio construction is based on the fundamental analysis of fund managers, which means an investor or manager can flexibly make own decision on value, while ignoring the opinions of the market.
The other types of macro funds include Commodity Trading Advisor (CTA), whose fund’s portfolio is constructed using price-based and trend-following algorithms, and the other type is Systematic, whose assets are chosen based on fundamental analysis, but portfolio allocation is determined by trading algorithms.
How macro hedge funds make their play in profiting from volatility?
As one might have already assumed, hedge funds that make use of such global macro strategies are global macro hedge funds.
Global macro hedge funds may position themselves around a particular outcome, or they can simply set up positions to profit from global market volatility when they do not have confidence in a prediction but know that a binary outcome is imminent.
Hedge funds that make use of such global macro strategies are global macro hedge funds.
Because of the large capital involved when it comes to hedge fund investments and hence their dominant role in markets overall, any sort of stance they take against or in favour of an economic event, are noticed worldwide and mirrored by investors elsewhere.
Some global macro hedge funds that felt confident that Britain would vote to leave the EU took long positions in safe assets, such as gold, and chose short positions against European stocks and the British pound.
Whereas, global macro hedge funds that were uncertain about the outcome took long positions in safe havens and other instruments that payout during market volatility.
What macro strategy can retail investors take advantage of?
Among the various macro strategies, experts recommend retail investors use long/short equity investing strategy.
Not because it’s easy to do profitably, but because you can do it with a good online brokerage account and you can do your own research.
Among the various macro strategies, experts recommend retail investors use long/short equity investing strategy.
Keep in mind! One shouldn’t be considering trying to replicate a hedge fund strategy unless you enjoy investing and don’t mind digging into financial statements and doing research, including valuation).
The fact that you’ll be both long and short stocks means your volatility should be lower than the overall market’s, and as long as you diversify and don’t get too concentrated in any one industry, you should be safe – keeping in mind to avoid leverage at all costs.
They pay the highest interest rate on cash balances, probably pay you a rebate on short sale proceeds (which most discount brokers don’t do) and are generally the choice for professional traders who trade independently if they don’t use a prime broker.
So while you may not be highly profitable, but you can minimize your losses if you are relatively diversified and have a fairly hedged portfolio of short exposure to balance out your long exposure.
Long-short equity investing has quite an elaborate scope and there are even a few ETFs and mutual funds that try to replicate this hedge fund strategy for retail investors.
Being such an investor one should read all their materials to understand how they approach it, then armed with that and other knowledge, do your own thing.
There are even a few ETFs and mutual funds that try to replicate this hedge fund strategy
Do all macro hedge funds operate under similar principles?
There are probably as many approaches to identifying and capitalizing on macro trends as there are macro hedge fund managers, but all the players and their approaches have several things in common.
First, macro players are willing to invest across multiple sectors and trading instruments. They are able to monetise every attractive opportunity, trend and strategy.
There are probably as many approaches to identifying and capitalizing on macro trends as there are macro hedge fund managers
Moreover, they see the entire globe as their playing field and are well aware that events in countries or regions can have a domino effect across global markets.
Leverage and derivatives are often used to accentuate the impact of market moves.
It is this use of leverage, on unhedged directional bets, that has the greatest impact on the performance of macro funds and results in the high volatility that they may experience.
Now, though, there are signs that some discretionary macro strategies are making hay in markets and economies rocked by the still-unfolding coronavirus pandemic.
Global macro hedge funds, which suffered disappointing performance last year, are widely tipped to stage a comeback amid extreme market volatility prompted by the COVID-19 pandemic
Discretionary thematic macro funds gained 4.61 per cent in March, new HFRI data shows, with performance for the first quarter at 3.0 per cent, while other hedge fund strategy types slipped deep into the red.
There was considerable varied performance across the sector, with some well-known fixed income-focused macro funds reportedly generating record gains while others lost more than half their portfolio value, according to bfinance research.
There was considerable varied performance across the sector, with some well-known fixed income-focused macro funds reportedly generating record gains
Risk of complexity, macro weakness
Global macro hedge funds can prove to be a complicated investment to pursue, as they are difficult to comprehend. This is partly due to the complex strategies employed.
While macro hedge funds assure high returns, the reality is it’s not always reliable due to the high risk and extremely volatile nature of the investment.
Global macro hedge funds can prove to be a complicated investment to pursue, as they are difficult to comprehend.
2018 was certainly rough for these strategies, as funds in the category were down approximately 3 per cent for the year as a whole, according to data from eVestment, but made up its losses in the year after.
Although historically it has mostly met its expectations from attractive returns and performance, the key challenge is whether your net returns (minus high charges) will help meet your investment goal.
If the US and China fail to come to terms on the trade war amid a weakening global economic picture, or in the current scenario wherein a cure for the coronavirus pandemic gets delayed indefinitely, analysts worry that investors could cool on global macro.
