Macro trading is the ability to distill global narratives into a thematic market hypothesis that you believe will play out in the long run. The aim is to predict and interpret macro-economic and political events and profit from the possible outcomes using the most optimal expression among a range of possible trading products, including currency, interest rates and securities.
Source: Illustration by Ingram Pinn
“Those with skin-in-the-game and the refined skills to trade their narratives will inevitably be rewarded handsomely by the markets.”
The most famous example of such a success comes from George Soros and his then lieutenant and head trader, Stan Druckenmiller. Both closely followed the development of Great Britain’s efforts, under the leadership of John Major, to stay within the European Monetary System. The problem was that Germany’s and England’s economic cycle didn’t coincide, causing huge economic friction between both their monetary and fiscal policies. The result, as both Druckenmiller and Soros predicted, was a necessary devaluation of the British pound and termination of their plan to join the European Monetary system. The trade was clear – sell the British pound.
According to sources, Druckenmiller came up with the original idea, but it was Soros who ordered him to bet the house – meaning to leverage Soros’ hedge fund operation to the hilt (according to various sources, at one point it was a 10 times leverage of their original NAV). The trade paid off – the Bank of England had to devalue the pound, Soros’ fund made over $1 billion in profits, and the rest is history.
The Return Of The Macro Trader.
Source: Illustration by Tom Jung
Over the last four to five years, the global macro strategy has suffered in performance. Consequently, this strategy has been in decline in popularity among institutional investors. Low volatility and the trend for computerized trading and automated decision-making has taken a big chunk out of macro funds. It seemed the strategy and their managers were out of touch with the rapid change of technology and the new normal of never-ending equilibrium and low volatility through February 2018.
Furthermore, a rare form of global economic stability with low inflation, low interest rates, and moderate growth resulted in very little volatility in any segment of the financial markets. However, volatility returned suddenly to equity markets with a spike in the VIX index (a measure of volatility in the US equity market) at the beginning of 2018, from low single-digit to as much as 35. Computer traders who had been betting on low volatility lost massively, with some ETFs losing everything. The winners were foremost individuals following a macro strategy.
Top 10 Performing Hedge Funds 2018
“Institutional investors, anticipating more interest rate increases in the US and political risks globally, have been regaining their interest in big macro funds. They poured nearly $12 billion into the strategy during the first four months of the year, surpassing the inflows from all of 2017 (data compiled by eVestment).”
Macro investments tend to perform best in high uncertainty/high volatility environments where macro factors exert a meaningful influence on asset pricing.
These types of markets affect factors such as interest rate differentials, foreign exchange balances, and the consequent over and under valuation of asset classes and sectors. As such, markets may be exploited through nimble and tactical positioning.
For the reasons stated above, we believe today’s markets are moving toward a state of disequilibrium that makes current asset valuations increasingly fragile. In other words, the current environment seems to be one in which Macro would be well positioned for strong performance and the time for active management is back.