Macro Investing’s Success as a Strategy

Macro hedge funds have boomed in the UK over the last few decades. Back in the 1990s, just a few well-known pioneers focused on this top-down, macro-economic driven thinking, including George Soros. But their notorious successes encouraged other investors to move into the sector, and within a decade macro investing had become mainstream.

Until fairly recently these macro hedge-fund managers managed to produce some pretty impressive numbers. Over the ten years to September 2010, the Dow Jones Credit Suisse Global Macro Index (an index focused on macro hedge-fund managers only) posted an annualised return of more than 12 per cent, compared to a –0.2 per cent annualised return for the MSCI World Equity Index.

The single biggest reason for these impressive numbers is that macro hedge funds benefit hugely from increased volatility in currencies, interest rates, commodities and equity markets.

Also, the macro strategy has a low correlation to shares. With a low correlation, the assets are neither positively correlated (always move in the same direction) nor negatively correlated (always move in opposite directions).

By including assets with low correlation, hedge fund managers can both reduce risk for the portfolio as a whole and invest more aggressively. But a third really important factor is that macro as a strategy performs well when markets are driven by overall macro-economic themes rather than by individual bottom-up fundamental analysis. And that’s precisely what happened in the last decade, as markets globalised and everyone became a macro-economic expert!

Macro hedge funds are in their element in a world where currencies freely float, countries encourage free trade, and capital import and export restrictions are relaxed. These unfixed FX regimes are likely to be volatile, and trading is also helped along by innovative new options-based financial structures, such as swaps and derivatives.

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