CHAPTER 1

Surveying the Global

Macro Landscape

Global macro, short for global macroeconomics, is the strategy of using eco-
nomic theory, educated guesses about the macroeconomic environment, and
geopolitical events to make large-scale investments around the world. It’s one
of the most important strategies for any global investor, no matter if they are
retail or institutional, because global events have a substantial influence on
the performance of any type of investment.
Global macro is often considered the most flexible and opportunistic
hedge fund strategy, due to the scope of traded products and the number of
markets it covers. Its aim is to preserve capital, using stringent risk manage-
ment to limit drawdowns. Profits are made through trades in equities, cur-
rency, fixed income, and commodities. These trades can occur anywhere in
the world, hence the term “global macro.”
Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

This chapter introduces the basic types of global macro strategies, histori-
cal returns of the strategy, and the various reasons why institutions choose to
allocate to global macro.

Types of Global Macro Strategies

Like any hedge fund strategy, global macro can be categorized into substrate-
gies. The four basic approaches of global macro are discretionary, systematic,
high frequency, and commodity trading advisors (CTAs).
Discretionary and systematic macro strategies both have the potential to
be extremely profitable and are powerful methods of analyzing markets and
determining investments. These are the two most often used global macro

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
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 4 An Overview of Global Macro

strategies but, because the four are often used together, it’s important to
understand how all of them work.

Discretionary
Discretionary macro trading, as the name implies, relies on a trader’s experi-
ence, intelligence, and knowledge to take subjective and often risky bets on
various global markets in order to capture alpha and the best possible risk-
adjusted return. With knowledge gleaned from studying global data, releases,
economic data, and central bank action, among countless other factors, an
investor can frame a top-down approach. This allows for a unique analysis of
the risks and opportunities offered by industries, sectors, countries, and the
macroeconomic situation at large.
Discretionary strategy requires serious organization and processing skills,
since it involves such a large amount of data. The ability to analyze data across
many different markets aids the trader in assessing whether or not a particular
market is fully incorporating all factors into global asset prices.
The discretionary macro strategy is nimble and can also produce alpha
in significant risk off markets. One example of a trader using historical pat-
terns to capture alpha this way is Paul Tudor Jones’s prediction of the Black
Monday crash on October 19, 1987. Jones observed that the market behav-
ior during that period could potentially experience a catastrophic crash. He
expressed this view by going short and made an enormous return on Black
Monday.
Global macro managers have the luxury of being able to trade a vast
amount of markets and also to go against the trend, shorting the stock market
while other hedge fund strategies and mutual funds remain long. Thus, dis-
cretionary traders have the potential to make a tremendous profit in a selloff,
Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

while equity managers tend to lose significant amounts of capital.

Discretionary macro traders may also determine trades based on direc-
tion and relative value. Directional trades are made in hopes of an asset mov-
ing in a particular direction. For example, if a manager is bullish he or she
could go long copper and hope to capture returns on the move up.
Relative value trades aim to pair or group assets together to capture the
relative value differential between those assets, and profit from a divergence or
change in the price difference. Looking at the European crisis, if a discretion-
ary macro trader believes that German yields will be less affected than Italian
yields, the trader can short Italian five years and go long German Bobls. If
matters worsen in Europe and Italy acquires more credit risk, it could see
yields rise in relative terms.

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
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 Surveying the Global Macro Landscape 5

Systematic
The second main type of global macro strategy is systematic macro. Systematic
managers employ a top-down model that takes various economic indicators
into account. By using large sets of quantitative data, systematic macro strat-
egies seek to earn alpha by capturing these dislocations. Systematic macro
funds typically employ many PhDs to “systemize” all these quantitative fac-
tors in order to produce a model of trading positions that removes the variable
of human emotion. Systematic macro prides itself on its stringent process,
strong back-tests, and the ability to operate solely on quantitative analysis,
hence ensuring maximum returns (assuming that past risk-adjusted returns
are predictive). Over long periods of time—several years or more—systematic
funds can produce more consistent returns than discretionary strategies; how-
ever, in periods of high volatility, they tend to underperform discretionary
macro, as they did in 2008. Holding periods for systematic macro can range
from days to months, or longer.
Systematic macro hedge funds have significantly changed the landscape
in Macro with the amount of capital they have attracted. AQR Capital
Management, founded by Cliff Asness, and Bridgewater, founded by Ray
Dalio, manage over $80 billion and $100 billion, respectively, and have revo-
lutionized systematic trading. The ability to trade multiple liquid asset classes
in systematic macro means that asset managers can oversee large amounts
of assets at once. Since equities, fixed income, commodities, and foreign
exchange are the most liquid markets, it allows these funds to grow assets to
previously unseen levels. Additionally, since strategies are constantly back-
tested and improved, large asset allocators such as pensions, sovereign wealth
funds, and endowments that have large amounts of capital to allocate, find
comfort in using a computer-driven process with predictable drawdowns.
Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

Many of these institutions have minimum allocations of greater than several

hundred million dollars, so, in a way, size also attracts more capital.
It is worth noting that, while systematic macro is scalable and can take
large allocations, it is wise to allocate to both discretionary and systematic
macro in a fairly even manner. This will allow an asset allocator to gain the
advantages of both strategies and hedge the disadvantages. Discretionary
macro is negatively correlated during periods of stress and, since discretion-
ary traders can get short in a nimble way, it can produce profit in economic
situations where most people are losing money. Systematic macro, on the
other hand, lets traders allocate safely and predictably with more assurance.
A good book on this topic is Expected Returns (John Wiley & Sons, 2011)
by Antti Ilmanen of AQR Capital Management (formerly of Brevan Howard).

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
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 6 An Overview of Global Macro

High Frequency Trading

A third type of global macro trading is high frequency trading. This is the
process of using highly sophisticated computers and technology to trade very
short-term (millisecond) dislocations that may exist in the market. High fre-
quency trading in macro is not as large or scalable as discretionary and sys-
tematic macro. Holding periods can range from milliseconds up to a few
hours depending on the strategy. In high frequency trading, processing speed
is of the utmost importance to ensure that certain dislocations are captured.

Commodity Trading Advisors (CTAs)

According to the National Futures Association, a Commodity Trading Advisor
(CTA) is an individual or organization that advises others as to the value or
advisability of buying or selling futures contracts, options on futures, or retail
off-exchange foreign exchange contracts. Since futures are traded on most
global macro markets, CTAs are considered a global macro strategy. Many
larger CTAs employ a model-driven approach that can be technical or fun-
damental. However, most CTAs utilize a highly automated trend-following
strategy that is in some ways similar to systematic macro. The methodology
on position sizing used by most CTAs, which we’ll also be using in this book,
originated with the Turtle Traders.
As with other trend-following strategies, CTAs perform very well over
longer periods of time—as long as several years. They are, however, subject to
large drawdowns (peak-to-trough) as a result. Man AHL and Winton Capital
Management, both based in London, are widely regarded as the premier
CTAs, each managing approximately $20 billion.
Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

Return Profile and Allocations

Global macro as a strategy is very attractive because of its return profile. The
Barclays Global Macro Index has achieved annualized returns of 10 percent
from 2002 to 2012 compared to the S&P 500, which has been 2 percent over
the same period. Additionally, the Barclays Global Macro Index has experi-
enced lower volatility on an annualized basis compared to the S&P 500 over
the same time period. As a result, global macro as a strategy has a higher
Sharpe ratio, with the attractive investment characteristics of higher returns
and lower volatility relative to other hedge fund strategies. Figure 1.1 dem-
onstrates the outperformance of the Dow Jones Credit Suisse Global Macro
Hedge Fund Index versus the S&P 500.

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
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 Surveying the Global Macro Landscape 7

FIGURE 1.1 Global Macro versus S&P 500 from January 1995 to September 2013

1,000
900
800
700
600
500
400
300
200
100
0

1/ 010
1/ 011
1/ 012
13
1/ 005
1/ 006
1/ 007
1/ 008
1/ 009
1/ 001
1/ 002
1/ 003
1/ 004
1/ 995
1/ 996
1/ 997
1/ 998
1/ 999
1/ 000

20
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
2
2

1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/

Dow Jones Credit Suisse Global Macro Hedge Fund Index S&P 500

Source: Dow Jones, Credit Suisse, and Bloomberg.

Global macro has shown a low correlation to S&P 500 returns, particu-
larly in periods of market stress. Since many macro traders short during bear
markets, this allows global macro funds to make money even when the mar-
ket drops precipitously (Figure 1.2). Having a low correlation to the S&P
500 and a negative correlation during market collapses is also a very attractive
return profile, and one of the reasons money managers tend to like global
macro. While global macro returns have come down from the 1980s, 1990s,
and 2000s with fixed income yields at historical lows and an atmosphere of
economic uncertainty, global macro has still seen profit in all markets, which
is why it remains a popular hedge fund strategy.
Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

As a result of the attractive uncorrelated return profile of global macro,

investors have allocated to the strategy. Another attractive aspect of global
macro is that it is one of the most, if not the most, liquid strategies in the
hedge fund universe, considering that the assets traded are the most liquid
to begin with. As a result of the very desirable return profiles and liquidity,
global macro is the most popular hedge fund allocation by pension funds, as
shown in Figure 1.3.

Hedge Funds and Global Macro

Some of the most famous hedge fund managers have emerged from global
macro. In 1992, George Soros earned his fame on Black Wednesday, where

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
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 8 An Overview of Global Macro

FIGURE 1.2 (a) Performance of Global Macro during the Top Five Losing Quarters in
SPX since January 1995 and (b) Performance of Global Macro during the Top Five Best
Quarters in SPX since January 1995

(a)
10.0%
4.2% 4.4%
5.0% 2.9% 4.0%

0.0%

–5.0% –2.6%

–10.0%

–15.0% –14.3% –13.7%

–15.0%
–20.0% –17.6%

–25.0% –22.6%
Q4 2008 Q3 2002 Q3 2001 Q3 2011 Q2 2002

Dow Jones Credit Suisse Global Macro Hedge Fund Index S&P 500

(b)
25.0%
20.9%
20.0% 16.9%
14.9% 15.0% 15.2%
15.0%
10.0% 6.0%
6.9% 5.5%
5.0% 0.8%
0.0%
Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

–5.0%
–10.0%
–10.5%
–15.0%
Q2 2003 Q3 2009 Q2 2009 Q2 1997 Q4 1998

Dow Jones Credit Suisse Global Macro Hedge Fund Index S&P 500

Source: Dow Jones, Credit Suisse, and Bloomberg.

he accurately predicted the devaluation of the British pound, making over

$1 billion dollars in one day and earning himself the title of “The man who
broke the Bank of England.” As mentioned previously, Paul Tudor Jones also
successfully shorted the stock market prior to the October 19, 1987, crash,
characterizing the week preceding the crash as one of the most exciting weeks
of his life.

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
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 FIGURE 1.3 Changes in Pension Funds’ Allocations to Different Hedge Fund Strategies from 2009 to 2012

% of Pensions' Hedge Fund Portfolio Breakdown by Hedge Fund Strategy

70% 65% 35%
2009 29% 2009
Liquid Strategies (<1 yr)

60% 30% 27%

48% 2012 2012
50% 25% 22%
40% 20%
30% 15%
10% 9% 8%
20% 10% 8%
10% 5% 1%
0% 0%
Equity L/S Equity L/S Macro CTA / Systematic FI RV

60% 40% 38%

Less Liquid Strategies (>1 yr)

52% 2009 2009

50% 35%
2012 2012
30%
40% 34% 25%
30% 20%
14% 14%
20% 15% 11%
9%
10%
10% 5% 0%
0% 0%
Equity L/S Credit Event Driven Multi-Strategy

Source: Barclays Prime Services.

Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
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 10 An Overview of Global Macro

Louis Bacon, Stanley Druckenmiller, Bruce Kovner, Colm O’Shea, and

Julian Robertson all earned their fame as discretionary macro traders able to
profit in both bull and bear markets using the disciplined approach, stringent
process, and analytic insight that are characteristic of global macro trading.

Summary

The goal of this chapter is to provide the reader with a brief introduction to
the concept of global macro, the four basic strategies it encompasses, and why
global macro is important to the macroeconomic situation at large.
Copyright © 2014. John Wiley & Sons, Incorporated. All rights reserved.

Gliner, G. (2014). Global macro trading : Profiting in a new world economy. John Wiley & Sons, Incorporated.
Created from hkust-ebooks on 2024-07-15 14:41:11.