Global Macro Strategy
Global Macro Strategy
Global Macro Strategy
November 2008
The word “Macro” refers to the hedge fund manager’s attempts to identify mispriced assets, based on
macroeconomic analysis. The word “Global” refers to the ability to find such opportunities worldwide.
Hence, Global Macro managers are able to invest dynamically across a broad range of trading
instruments and sectors, moving frequently from an opportunity to another when expecting a shift in
the economic or political situation.
Some history
In the 90’s, the Global Macro strategy was the most popular hedge fund strategy worldwide, accounting
for about 70% of hedge funds by assets under management. Today, the global macro strategy
represents less than 20% of all hedge fund assets.
One of the most famous global macro strategies is a relative value (see below for the definition) trade
designed by George Soros, also known as “the man who broke the Bank of England”. George
Soros bet that the UK would be forced out of the European Exchange Rate Mechanism (ERM) in 1992.
He borrowed sterling pounds and converted them into a mixture of Deutschmarks and French francs.
On September 16th 1992 (Black Wednesday), Soros’ bet paid off when the pound reached its lowest
level.
More recently, Global Macro strategies have managed to weather recent market turmoils better than
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most of the others, as illustrated in the chart below. This chart shows that the HFRI Macro Index (red)
did not suffer large drawdowns in the past weeks as opposed to the equity market (green) and hedge
funds in general (blue).
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The HFRI Monthly Indices ("HFRI") are a series of benchmarks designed to reflect hedge fund industry performance by
constructing equally weighted composites of constituent funds, as reported by the hedge fund managers listed within HFR
Database. The HFRI Macro Index reflects the performances of Global Macro hedge funds.
HFR indices vs. Market indices from October 2003 to October 2008 (source: HFR)
Global Macro managers’ profits are typically derived from correctly anticipated price trends and spread
moves across markets. Generally, global macro managers are more value-oriented but can also take
outright directional positions, depending on their own expertise.
Some managers decide their trades based on their subjective opinion of market conditions, while
others will use quantitative rules. Trading methods used by Global Macro managers can be classified
into two main approaches:
- the discretionary approach, meaning trading decisions are based on managers’
subjective opinions of market conditions;
- the systematic approach, meaning trading decisions are based on a quantitative model.
But other managers use a combination of both methods. However, all global macro managers are
linked by the international scope of their strategies, the use of leverage and a primary focus on
structural macroeconomic trends.
In either approach (discretionary or systematic), Global Macro strategies fall under two categories:
- directional: the manager bets on discrete price shifts with long or short positions.
- relative value: the manager pairs a long and a short position in similar assets to take
advantage of a relative mis-pricing.
Advantages Drawbacks
Global macro managers use a more diverse range CTA’s managers trade only futures and
of instruments and also invest directly into options
securities or currencies in addition to trading
futures and options
Global macro managers follow a more CTA’s are often momentum traders
fundamental-oriented approach
Global macro managers are more discretionary: in CTA’s generally use a systematic
general, it is the manager’s subjective vision of quantitative approach
market conditions lead to trade
Global macro managers usually rely on a “team” CTA’s typically rely on one or two
specialized across the wider range of financial portfolio managers
instruments they trade
At RaisePartner, we provide risk and performance modelling tools that put the manager at the center
of the quantitative modelling process, through the expression of expected trends. We bridge this
fundamental expertise with unique reactive risk models and robust dynamic allocation schemes
coming from robust control theory.
This systematic strategy did not suffer large drawdowns in September and October despite the crisis.
In the chart below, we compare the RP Quant Global Macro Index to the HFRI Macro Index:
Base-100 performances (RP Quant Global Macro Index vs. HFRI, source: HFR)
Annualized ex-post statistics (*based on monthly returns from June 06 to October 08)
For more information on the RP Quant Global Macro index, visit our website.