What is global macro investing?
Global macro investing is a type of strategy mainly used by hedge funds, whose bets are based of political and economic views. This strategy is highly diversified since the funds that apply it are allowed to hold positions in various asset classes. For example, a global macro fund might make bets on the next president by buying the sectors he favors the most or bet in changes in interest rates by using derivatives fixed-income assets.
Short positions, leverage and the active management approach contribute to a higher management fee than other funds. Although, according to a research paper from Morgan Stanley usually these funds have uncorrelated strategies and almost zero downside correlation with equity and bond markets.
Thus, during crisis periods these funds have a positive performance while the market is in negative territory.
What are the most common markets used in global macro strategies?
Global Macro Investing generally focuses on four markets that have macroeconomic event exposures. These markets are liquid due to the nature of their importance and day-to-day use in economic activity spread around the globe. Such markets include: Foreign Exchange (Currency Markets), Commodities, Equity Indices and Fixed-Income Securities. What determines the fluctuations between strength and weakness, supply, demand and urgency of these markets range from geo-political events, monetary, fiscal and economic policies, increased or decreased outputs in production, natural disasters, political sanctions, regulation or deregulation and economic reforms.
Commodity Markets were implemented for producers, farmers and corporations to hedge certain risks and for price discovery of the underlying commodities. Speculators are a big part of these markets nowadays. The most popular instruments to trade and implement these strategies are spot, future markets and options on futures. Still to this day Hedge Fund Managers and Institutional Investors consider certain commodity prices, like oil, to be one of the leading market and economic indicators. Macro Funds have an exceptional understanding of the global trade environment, which allows them to profit from trades in the short, medium and long term.
Exchange Traded Funds (ETF’s) on Equity Indices are used by most hedge funds, institutional investors, investment banks and traders to gain exposure, hedge risks or speculate on a sector or country. The most popular instruments are Futures contracts of a particular index, ETF’s, options on futures and options on ETF’s. The E-Mini S&P500 futures contract and the SPY ETF are the most popular amongst the institutions mentioned before. Furthermore, if an institution wants to bet against the oil industry because its analysts believe renewable energies are increasingly more efficient and cheaper, then it might buy an ETF that tracks renewable energy companies. The same might happen for an investor that believes India will have a bigger economic growth than the US. It will sell some of its SPY shares and reallocate the proceeds to an Indian ETF.
This type of strategy mainly focuses on monetary policy, economic and political situation. Directional bets and value trades are placed on various aspects of the economy, which are guided by benchmark interest rates. The most popular and commonly used instruments are US Treasury Bills and Treasury Notes. Roughly $600 Billion worth of these two instruments are traded every day. Mortgage bonds, corporate, municipal and commercial real estate bonds are other types of instruments institutional investors can use to position their beliefs in the state of the Macro environment around them. Sovereign government debt from emerging markets is also very popular amongst Global Macro Funds. This type of government debt often yields higher returns but is also more volatile and poses a higher risk of default when compared with US government debt. Derivative instruments can be used to hedge against those types of risks and make directional bets on other aspects of the economy, such as housing and commercial real estate.
How decisions are implemented in these funds?
There are 3 main types of strategies that might be implemented: Systematic, discretionary and CTA. The discretionary strategy uses fundamental data and a top-down approach to express their view. Usually, the manager deploying a discretionary strategy invests in a broad set of themes that are in the vogue. CTA strategies are more quantitative and because the methodology used for long and short positions is based on trend-following algorithms.
Systematic strategies are considered a hybrid between the previous two, since decision is based on fundamental analysis, but the trades are placed according to a model. Due to the statistical based strategies, CTA and Systematic funds can offer tailored products to its investors like volatility targeting funds.
Who are the biggest names in the industry?
The three biggest macro funds measured by Assets Under Management are Bridgewater Associates, Renaissance Technologies, and Man Group. These three operate in very different markets and in different ways. Bridgewater Associates is the biggest known Global Macro Fund in the world with $138 Billion of AUM as of April 2020 and uses economic trends such as inflation, US GDP and currency exchage rates to make investing decisions. Renaissance Technologies is not considered a Global Macro Fund though it operates in almost all types of markets. Its strategies revolve around systematic trading using quantitative models. Man Group is considered an active management business and offers various types of strategies ranging from quantitative methods to real estate. Man GLG, one of its operations, focuses on absolute return and covers almost all asset classes, sectors, and geographies.
This article is in our December Newsletter
João Ferraz, MSc in Finance
Lourenço Cardoso, BSc in Finance