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Global Macro Strategy

18 March 2017

Global macro fund managers have the broadest investment mandate among the various types of existing hedge funds. Managers can invest on almost any market, using any financial instrument.

global macro hedge funds

Their investment approach is typically top-down, as their choices are prevailingly based on the analysis of macro-economic variables associated with the different countries in which they have decided to allocate their capital. Market forecasts are generated by econometric models, trying to leverage the inconsistencies perceived by the statistical analysis of macro-economic variables, such as gross domestic product, balance of trade, public deficit, population and demographics, treasuries yield, equity market returns, prices of raw materials, exchange rates, etc.

Fund managers form their own view as to the prevailing trends on financial markets, and then try to capture returns by trading the main world macro-economic indices. They trade all asset classes (treasuries, currencies, corporate bonds, precious metals, commodities), use all financial instruments (securities, indices, options, spot, forward and futures contracts, swaps, etc.) and use short selling and leverage. Some invest in commodities only by way of derivatives, whereas others even invest in physical commodities. Generally, there are no predetermined geographical restrictions to their investments; therefore, they can trade all over the world, from G7 countries to emerging markets.

Macro fund managers try to anticipate price changes on capital markets and often establish directional positions, i.e. unhedged. To identify events that will produce price changes, they focus on the analysis of how political events, global macro-economic factors, economic and financial fundamentals and other external factors influence the valuation of financial instruments. At the same time, they also analyze capital markets directly, and the risk/return potential of a given investment.

If through the top-down analysis of fundamentals the fund manager decides to anticipate a market trend, he is going to use the financial market analysis to determine the market timing and the financial instruments that best suits his opinion. Every trading decision must necessarily be consistent with the manager’s macroeconomic view, but it also has to be consistent with the risk profile of the entire portfolio. In addition, for global macro hedge funds, the main objective is capital preservation.

Due to the directional bias of their investments, global macro fund managers generally offer little transparency to their investors. They deny interviews to journalists and if they do 240 Investment Strategies of Hedge Funds discuss their performance with the investors at all it will be several months later and in very general terms.

In the case of macro funds, however, the key player is the manager, who with his insight and skill generates investment ideas and seeks to seize the less obvious investment opportunities.

Profits will be reaped if the fund manager correctly anticipates the price movements on global financial markets. Their investment philosophy is opportunistic, as they trade in any capital market sector presenting profit opportunities and with any financial instrument, in that they opportunistically replicate the most specialized strategies belonging to the other fund classes. Macro funds are similar to multi-strategy funds, except that they carry out directional investments and many discretionary hedge funds are very similar to managed futures funds.

In comparison to the hedge funds managed along the strategies analyzed up to now, global macro hedge funds are generally characterized by a larger size in terms of assets under management. They trade on highly liquid markets, for example the currency, commodity and treasury markets, and since they do not go for niche strategies, they can handle their positions without affecting market prices to their disadvantage.

One of the most important indicators used by hedge fund managers is the average number of days necessary to settle a position.

Directional strategies represent a substantial departure from the original hedge fund philosophy according to the Alfred Winslow Jones model. In broad terms, macro funds are also defined as being hedge funds, not because they provide a hedge, but rather because they are not subject to the constraints and limitations of mutual investment funds. Instead of hedging market risks, they seek to profit from the direction of movements on financial markets, establishing directional positions that reflect their predictions in terms of market direction. As a result, their performance fully depends on the quality and timing of their predictions. Macro funds tend to invest on capital markets of highly developed countries as well as of emerging countries. They rapidly jump from one investment opportunity to the other and from one asset class to the other. Sometimes they make a wide use of leverage and of derivatives, and their returns are often highly volatile with respect to the other types of hedge funds.

Using a metaphor, we can say that macro funds are comparable to the queen on the chessboard, the most powerful chess piece who can move in any direction.

Filippo Stefanini Investment Strategies of Hedge Funds

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