What Is a Global Macro Strategy?
Let me explain what a global macro strategy is. It's a hedge fund or mutual fund approach that bases its holdings mainly on political forecasts for different countries or the macroeconomic principles that significantly affect those economies. You can expect holdings to include long and short positions in equities, fixed income, currencies, commodities, and futures markets.
For instance, if I as a manager think the United States is heading into a recession, I might short sell stocks and futures on major U.S. indices or the U.S. dollar. At the same time, if I spot growth potential in Singapore, I'd take long positions in that country's assets.
Keep in mind that global macro funds are usually actively managed, which translates to a higher investment threshold and higher fees for you as an investor.
How Global Macro Strategies Work
Global macro funds construct their portfolios based on predictions of large-scale events at the country, continental, or global level. They implement opportunistic strategies to profit from macroeconomic and geopolitical trends. As a strategist, I'd forecast and analyze factors like interest rates, politics, domestic and foreign policies, international trade, currency exchange rates, and other elements.
These funds are among the least restricted, allowing you to place virtually any type of trade using almost any security.
Types of Global Macro Strategy
Global macro funds typically combine currency-based, interest rate-based, and stock index-based trading strategies. In currency strategies, funds look for opportunities based on the relative strength of one currency against another. They monitor and project global economic and monetary policies, executing highly leveraged trades via futures, forwards, options, and spot transactions.
For interest rate strategies, investments focus on sovereign debt, with directional bets and relative value trades. Managers concentrate on monetary policy, the economy, and political situations, using vehicles like U.S. Treasury and European debt, as well as government debt from other developed and emerging countries.
In stock or equity index trading, the strategy analyzes a country's equity or commodity index using futures, options, and ETFs. Managers aim to create portfolios that outperform the index in low interest rate environments, focusing on liquid assets that are easy to trade during uncertainty. These assets carry only market risks, without liquidity or credit risks. Some funds specialize in emerging market countries.
General Types of Global Macro Funds
There are several generalized types of global macro funds, most aiming to profit from systemic and market risk factors. Discretionary global macro funds build portfolios at the asset-class level from a top-level view of global markets. This type offers the most flexibility, as managers can go long or short on any asset worldwide.
Commodity trading advisor (CTA) global macro funds use various investment products, but they rely on price-based and trend-following algorithms to construct portfolios and execute trades, rather than top-level views.
Systematic global macro funds employ fundamental analysis to build portfolios and execute trades via algorithms, making them a hybrid of discretionary and CTA funds.
Key Takeaways
- A global macro strategy bases its holdings on the economics and politics of various countries or their macroeconomic principles.
- This strategy is used primarily by hedge funds and mutual funds.
- The three types of global macro strategies are currency-related, interest rate-related, and stock or equity index-related.
- Fund types include discretionary global macro funds, commodity trading advisor global macro funds, and systematic global macro funds.
Global Macro Hedge Funds
These funds are generally actively managed, aiming to profit from broad changes driven by political and economic factors. They can be quite diversified, providing exposure to various assets and instruments. As actively managed funds, they come with higher investment thresholds and fees.
In the 2019 Hedge Fund Industry Awards nominees announced by Institutional Investor, several global macro funds stood out. For example, New York-based Element Capital Management, under Jeffrey Talpins, jumped 17.3% since 2018. The fund uses a multi-process approach combining macro fundamental, systematic, and relative value analysis, with $55.88 billion in assets under management as of November 2018.
Another notable fund is Bridgewater Associates, which posted a 14.6% increase in its Pure Alpha Strategy, reporting $124.7 billion in assets under management as of 2018.
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