Global Macro Analysis – Trading Tutorial

Global Macro is usually a top-down approach or vice versa (bottom-up). This means that the global economy is analyzed first and then broken down into different countries, regions and asset classes in order to develop an investment idea. This results in one of the largest, if not the largest, unrestrictedly investable investment universes, giving you the opportunity to trade any tradable asset in the world. The only restriction is therefore liquidity.

However, the focus is on stock indices, currencies, government bonds, interest rates and commodities. Investments are made in these asset classes either through direct ownership of the underlying, such as equities and bonds, or through derivatives, such as options and futures.

Types of Global Macro

In general, Global Macro can be divided into two categories:

  • Discretionary
  • Systematically

Discretionary means that the hedge fund is managed by a single portfolio manager or a team of portfolio managers, and that these managers implement investment decisions manually. The investment decisions are generated by manual research on the economy and fundamental data, and extended by technical approaches where appropriate.

Systematic managers, also known as CTAs (Commodity Trading Advisors), use quantitative investment strategies in which computer models take over the trades and investment decisions.

Approaches and strategies

Global Macro involves different approaches and strategies. Here I would like to introduce you to the most popular approaches used by Global Macro managers to give you a better understanding of the sources of performance and risk.

Relative Value/Perceived Arbitrage

This approach will be found in many Global Macro portfolios. Relative value implies the simultaneous buying and selling of an asset pair (also known as pairs trading). This means that you are either betting that the spread will narrow (convergence trade) or widen (dispersion trade).

Relative Value trades offer a variety of possibilities and objectives. An example in the stock market is to go long in a sector and short in the market, with the expectation that the sector will outperform the market.

In the bond market, for example, you could take a long position in a 2-year government bond and a short position in a 10-year government bond of the same country. These trades are called intra-curve value trades and you try to profit from the rise in the yield curve.

Although the essence is always similar, the main difference is whether the trades are implemented through a top-down or bottom-up approach. Global macro hedge funds develop relative value trades with a top-down approach, for example by trading a stock index of one country relative to a stock index of another country. Another example would be to trade the currency of one country relatively against the currency of another country. For example, bottom-up would involve trading a corporate bond issued by an American company against a US government bond with a different maturity, and so on.

Directional/Mean Reversion

In normal stock exchange hours, directional trades are less represented in the portfolios. However, in turbulent times or crises, directional trades can account for the highest proportion of the entire portfolio. Similar to relative value trades, global macro managers assume that the asset is over- or undervalued. However, in contrast to relative value, only an outright position long or short is entered into here. Outright means that the position is unhedged, i.e. without an offsetting position being taken. Relative Value is always about the valuation of two assets. With directional/mean reversion, on the other hand, it is only about one asset that is traded on its own. But the logic behind it is the same as with relative value.

If Global Macro Managers find a thesis regarding a mispricing in the market or a profound change in the market structure, they can buy or sell the asset outright, for example to speculate on movements towards the historical average price or towards a fair valuation.

Many prominent Global Macro Managers have achieved notoriety by successfully implementing such trades when they have generated significant profits for their hedge funds. George Soros is probably the most famous example, when he bet his short in the British pound on a massive devaluation of the pound, which led to the UK having to leave the so-called European Exchange Rate Mechanism (ERM), a forerunner of the euro. Another well-known example is Paul Tudor Jones, who correctly predicted Black Monday in 1987 and shorted the US stock market.

In summary, relative value trades tend to be market neutral, while discretional trades carry a higher level of market risk. With this approach, hedge fund managers are therefore also willing to accept this risk.

currency carry

This is also a macro approach, which is similar to the relative value approach in that two assets are traded against each other. However, this is not about mispricing the two assets relative to each other, but rather about trying to profit from the different interest rates of the respective currencies. So you short a currency whose country has a low interest rate (e.g. Japan) and you go long in another currency whose country has a higher interest rate (e.g. Australia). There are therefore two scenarios: You either want to participate in the spread of the two currencies or, which is probably the more important aspect for global macro managers, you want to speculate on a widening of the spread. In other words, you are also speculating on an appreciation of the bought currency against the sold currency.

There is also the possibility of entering into reverse currency trades. In this case, the currency with the higher interest rate is hoarded and the currency with the lower interest rate is bought. The expectation here is that the spread and the interest rate differential will narrow.

The risk here is that the expected ratio will turn around. Since carry trades are often also implemented with high leverage, there is an increased risk here.

Momentum/Trend Following

This approach was and is the core of performance for many systematic global macro managers and is also used by many discretionary managers. It involves buying up former winners and selling out losers, with the expectation that winners will continue to perform well and losers will perform badly. The approach can be implemented in all assets, but is most popular in commodities, currencies and equity index futures.

The model can be implemented in different time units. That is, in the short, medium and long term. Short-term in this context means a few hours to less than a month. Medium-term (which is the most commonly used time unit) means a time horizon of one month to six months. Everything over six months is defined as long-term. The approach naturally performs best in trend phases and problems when trend reversals occur. Moreover, especially in trendless phases, the emerging volatility can constantly force positions to be closed, which can lead to losses, also due to high transaction costs.

Conclusion of this short presentation of Global Marco

Global Macro is rightly very popular among hedge funds. Here you have all the opportunities to participate in price fluctuations, trends and mispricing. In addition, you have one of the largest investment universes and therefore a multitude of investment opportunities.

The best performance can be achieved in volatile phases. Global Macro strategies offer the possibility of generating a stable performance with a lower correlation and a lower risk. Investors looking for a broadly diversified portfolio with low risk will find what they are looking for in Global Funds.

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