Macro Investing in Action - dummies

By David Stevenson

Macro hedge-fund investors in the UK and around the world think big! They’re global in scope, willing to use different asset classes whenever appropriate and, crucially, likely to be internally organised in a very different way compared to rival strategies. Most successful macro funds are run as funds of funds, where risk capital is spread out among different styles, markets and countries but all under one roof with a centralised risk control function.

Macro hedge-fund managers have another peculiar focus: as traders they like to get in early to catch a key trend or investment idea and then tend to exit before a market finally turns; that is, shoots up or down in value by a substantial margin.

Other unique characteristics for macro hedge-fund traders include:

  • Their portfolios are usually very liquid and their funds generally offer investors redemption terms that reflect this liquidity.

  • They tend to make most of their money when volatility (in FX, bonds or shares) increases; that is, they tend to perform well during times of increased risk and uncertainty.

  • They may have dozens of individual positions, but in reality tend to relate to just a few big themes or ideas.

    Macro investing is all about a ‘smart idea, grounded on exhaustive research, followed by a big bet’.

    Julian Robertson, macro hedge-fund manager

The best-known global macro funds include George Soros’s Quantum Fund, as well as Moore Capital, Caxton Associates, Brevan Howard and Tudor Investment Corporation. The long-term historical record suggests that many of these funds have delivered astonishing returns. For instance, Soros’s Quantum Fund returned 30 per cent per year between 1968 and 2000 while Paul Tudor Jones turned in five back-to-back 100 per cent+ years early in his career.

These big numbers have been powered by some even bigger macro investment calls! Back in 1987, for instance, Jones successfully predicted and traded on the collapse of the developed-world stock markets. Five years later, in September 1992, Soros forced the British government to pull the British pound from the European Exchange Rate Mechanism, and in the process famously made US$1 billion.

Soros suggests that a huge trade deficit is frequently accompanied by the government spending more, as well as tight monetary policy (higher interest rates to stem borrowing). If that’s the case, a country’s currency may rise in value, as the US (dollar) did in the period 1981‒1984 as global investors flooded into the US attracted by its tight monetary policy.

But not all macro trades have been quite so successful. Back in 1994 for instance many managers incurred large losses when they made huge, unhedged bets that European interest rates would decline, causing bonds to rise. What happened was that the Federal Reserve raised interest rates in the US, pushing up euro interest rates!