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Macro Hedge Funds for Your Investment Portfolio

Although many UK investors obsess about risky assets such as shares, hedge-fund managers are on the whole a fairly dispassionate bunch. They’re happy to go long or short any asset class, bonds or shares. Their core concern is to use any asset class to make money in any kind of market.

I don’t play the game by a particular set of rules; I look for changes in the rules of the game.
George Soros, legendary macro hedge-fund manager

One particular breed of hedge-fund manager takes this dispassionate, multi-asset class world view and moves it on to a whole new level. Macro-fund managers think across asset classes, and start with a top-down analysis that’s inexorably linked to an understanding of how macro-economic factors affect individual markets.

In essence, they may start with an analysis of inflation or interest rates in different countries (they’re a fairly global bunch) and then work out a strategy that involves trading everything from bonds and FX to shares to express that macro view.

You can see their approach as top-down thinking but applied to different individual markets using a bottom-up analysis. In other words, they use macro factors and examine the individual dynamics of a market or security to look for an investment opportunity.

Macro managers can go long or short, and use leverage to improve their returns. Unlike conventional managers with portfolios full of different, diversified stocks (or bonds), macro managers take concentrated positions – ideally with limited downside but huge potential upside. Their trades usually fall into one of two major categories:

  • Directional: Capturing a trend, no matter how fleeting.

  • Relative value: One currency, for instance, may be undervalued compared to another.

Many macro funds are also high-frequency traders, responding to news flow such as employment and GDP figures to make a large number of small bets on interest rates and stock and bond prices.

Whichever strategy they use, these macro hedge funds tend to employ a fairly limited number of trading instruments:

  • FX trading is usually based around the relative value or strength of one currency versus another. Currency pairs are a staple of the macro trade, and these pairs trades can be executed in markets that are extremely liquid and trade 24 hours a day, 6 days a week, usually based around the interbank market. The leverage involved can amount to as much as 100 times. Favourite ideas include the carry trade and a focus on emerging-market currencies appreciating.

  • Interest rate trading usually involves global sovereign (government) debt, with lashings of leverage. Strategies include outright directional movements on government debt through to relative value trading in which a portfolio manager trades one debt instrument relative to another.

  • Equity index trading is based on a benchmark index such as the S&P 500 and involves everything from simple ordinary shares to index options.

Macro-fund managers are usually looking for long-term shifts in capital flows, that is, big trends. Therefore they take a world view with a medium- to long-term perspective. They also tend to concentrate more on fixed-income products such as bonds and currency markets than on equity or commodity markets.

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