Let’s look back on a historic, discretionary macro trade:
In September 1992, the British pound was fixed to the Deutschemark through the European Exchange Rate Mechanism (ERM), a precursor to the Euro we know today. If you tried to sell pounds below a certain level, the Bank of England (the central bank of the UK) was obligated to come into the market and buy. Many investors, most famously George Soros, thought that the situation was unsustainable and kept selling until the Bank of England gave up and the UK dropped out of the ERM and broke the link to the mark, netting a huge profit for those who been on that side of the trade.
Soros vs the Bank of England is a classic macro trade – looking at the conditions of the macroeconomy and trying to identify prices which are not consistent with the fundamentals. In this case, the high interest rates required by Germany to control inflation needed to be matched or bettered by the Bank of England, but the required 12% interest rates were going to choke off an already weak United Kingdom economy. To avoid a recession in the UK, the British Prime Minister, John Major, decided to break the link between the British Pound and the Deutschemark.
I bring this up because a fund we manage was recently re-classified by Morningstar from Multialternative into a newly created category, Macro Trading. However, “Macro” is thrown about without great specificity, and it’s only fair for me to tell you how I understand macro trading.
For the average investor, the promise of macro investing is simple: by investing in different instruments in different ways, a macro strategy seeks to add value to a core portfolio of long stocks and bonds. A macro strategy can trade currency, foreign exchange, or commodities. While a macro strategy can also trade stocks or bonds, remember that it likely has a much broader group of asset classes to choose from and the ability to go short as well as long.
My own entry into macro trading came in the 1980s while I was still in high school. My father was a bond trader and I had both an aunt and an uncle that worked on Wall Street. We were the type of family to discuss inflation or the Hunt brothers trying to corner silver over Thanksgiving dinner. At a young age, I took an interest in computers and computer programming. Intrigued by the power of computers and the efficiency in completing complex calculations, my dad enlisted me, my newly minted computer skills and my trusty TRS 80 fresh from Radio Shack to examine some theories he had about the 5 year note… and I have spent the intervening 30 odd years as a macro researcher and portfolio manager. I had my own macro hedge fund for nearly 15 years and in 2011 I joined my longtime colleague, business partner, and friend Rob Stein as the CIO at Astor Investment Management. And to place me squarely in my niche, I am specifically a quantitative global macro manager.
By “quantitative global macro”, I mean trying to find regular relationships between the macro economy and price returns. I, with my team, build robust, repeatable, systematic models that seek to identify mispricings across global markets. This is opposed to “discretionary” – like the Soros trade – where the workflow is to sit around the conference table and talk to your friends on the phone to guess what the Fed will do and when. By contrast, quantitative global macro managers typically use long histories of data while trying to find economically intuitive and empirically fruitful systematic strategies. For example, imagine that a large current account deficit leads to lower currency returns in the future. A macro fund might use that fact – one among many – to build a position long or short a currency. Or consider the real rate of interest on a bond: the higher the real rate of interest (in general), the better bond performance may be believed to be in the following period. A significantly above average real rate of interest in a given country’s government bond might induce a long position.
I am excited to be working in this space right now, as there is a good argument to be made that long-only stocks or bonds portfolios might be challenged in the years ahead. Stocks are as expensive as they were in 1999, whether measured by historical or prospective earnings. While they stayed at that peak a good while, they eventually declined. Bonds have historically low yields and seem in the mood to normalize – threating poor returns ahead I believe.
Thankfully, for the global macro manager the world is not limited to long-only stocks and bonds. Expensive traditional assets may provide selling opportunities. Even our current situation of unprecedented growth after the unprecedented shut down of the world economy may provide dislocations away from fundamentals that could provide investment opportunities.
Macro strategies, in my mind, are the purest of alternative products – able to go anywhere and do anything in a quest for returns for investors. When many are wondering about how long the bull market can continue, I think it might be a good time to consider diversifying.
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