The growth of economic or macro trading has led to a significant increase in the identified managers in the Hedge Fund or Alternative Asset space. Specifically, global macro strategy refers to decision making based on global political, economic events which shape policy. This can extend to a wide range of events including austerity measures, political coups, interest rate and monetary policy changes etc. The growth in the number of funds focused on this strategy accelerated in the late 1990s with George Soros highlighted as the pioneer. His infamous bet against the Bank of England and the pound, illustrated how financially lucrative the strategy could be on a large scale.
A Global Macro manager in defining their portfolio allocation, will look at a wide array of economic data. Unlike other traditional styles including stat arb, or convertible arb, the judgment is made up to the manager and there is no formula for success. An example of a specific Global Macro situation is identified below:
Eg.
Hedge Fund Manager A is GM focused. He concentrates mainly on the commodity markets and identifies opportunities based on economic and political conditions and factors. In 2010, the Euro Zone announces that it will be supplying Country A with a bailout package due to short term liquidity problems in the debt markets.
Hedge Fund Manager A believes that Country B and C may also experience problems in this area, and he decides to look back historically at what commodities weakened or strengthened during such situations. In 1997, Gold rose spectacularly off the back of debt fears in Asia.
Hedge Fund Manager A then decides to go long Gold, forecasting a temporary squeeze in the equity and currency markets. Two months later, Country C announces a debt default pushing Gold to record levels.
Global Macro trading in essence focuses on the identification of situations and events rather than statistical modelling. Discretion and judgement are both key. Sometimes highlighted as ‘risk managers’, Hedge Fund managers that identify with this strategy focus on defining market movements based on economic theory. Like any other strategy, Global Macro has some identified risks which include:
Inability to effectively hedge
Possibility of swing away from traditional market movements (ie interest rate rises could have an adverse influence)
Determination of exit strategy: Difficult to identify the specific point of exit
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