The Global Macro hedge fund strategy can be defined as dynamic global asset allocation. Global Macro hedge fund managers have the ability to take positions in any instrument in any market throughout the world. Asset allocation is the most important determinant of profit in any portfolio and the ability to switch assets from one market to another means that such funds should be well placed to reap profits from many different sectors as the potential arises.
Generally, a Global Macro hedge fund will invest to take advantage of trends in broad economic sectors (such as currencies, bonds, or stock indices) .
Global Macro fund managers often invest through futures or forward contracts traded on regulated world exchanges from North America and Europe to the Far East and the Southern Hemisphere. A fund’s portfolio may consist of stock indices, bonds, notes and interest rates, currencies, metals (precious and industrial), grains, energy, meats, soft commodities and various other instruments such as carbon emission futures and volatility and commodity indices.
Diversification over many asset classes should enable a fund to benefit from whatever sustained trends occur in each market segment. While it is undoubtedly true that correlation between asset classes (positive or negative) tends to strengthen in periods of crisis, in more normal times the benefit of wide diversification is that more opportunities will present themselves and profit can be sought in one or more upwardly trending asset classes at times when trends are not evident in other asset classes. In general, this can lead to a smoother and greater return on equity than investment in any single asset class such as stocks.
Investing in futures is often thought by the general public to be a zero sum game: one player’s profit represents another’s loss. Some have questioned how therefore a participant can hope to profit in the long term. The answer is by adopting a well researched and well designed rule based investment system. Others participants must still lose over time for the Fund to succeed. An often quoted theory breaks down market participants in terms of what they expect to “gain”: not everyone expects financial profit from their participation. Farmers and producers or refiners of raw materials use the futures markets to “hedge” their production. As a class, they are not investing for profit and they expect to pay a “premium” to other participants in the markets (such as long term investors) in order to transfer some of the risks associated with their day to day production business.
Discretionary Fund Management
Discretionary fund managers apply judgment and intuition in making every investment decision. In order to arrive at a decision, they may well consult price charts and other “Technical Analysis” but their decisions are primarily based on “Fundamental Analysis” of factors extrinsic to the markets, such as supply and demand, general economic conditions, government actions, industry conditions and corporate management. A certain gut feeling is sometimes involved in discretionary fund management and this can lead to the emotional balance and decision making capacity of the manager being unduly affected by irrational optimism as markets rise and exaggerated pessimism during a market downturn.
Systematic Fund Management
Systematic fund management employs quantitative, mechanical, non-emotional trading rules based on mathematical models of market behavior, often concentrating on price alone. Systematic fund managers ignore news, weather, politics and other “fundamental” factors except as they are reflected in market prices. System output consists of precise buy and sell orders, including quantities to buy and sell, and markets to trade. Discretion used consists solely of decisions as to portfolio composition and the making of changes to the systems employed, based on thorough and empirical ongoing research over time. Discretion is also exercised in the timing of rolling over futures contracts from one delivery month to the next and in the choice of which contract months to include for optimal profitability. Judgment is exercised on order execution .to ensure that orders are processed at times of maximum liquidity and minimum bid/offer spreads.
A gentle introduction to Global Macro and hedge fund strategies in general is provided by Jack Schwager’s Market Wizards, an ever popular book for those seeking to enter the markets. The book provides amusing and insightful conversations with some of the world’s best known hedge fund managers and a few more private individuals who simply trade for themselves.
Highly recommended but as to the success of the strategy you would be well advised to do some research into how such characters have featured over time. Hedge Fund global macro may have lost its shine due to the weight of money following such strategies.