Global macro is the strategy of investing on a large scale around the world based on economic theory. The strategy is typically based on forecasts and analysis about interest rate trends, the general flow of funds, political changes, government policies, inter-government relations, and other broad systemic factors.
Macro trader Yra Harris claims that "global macro" is really a new term, which used to be called "geopolitics". George Soros employed a global macro strategy when he sold pound sterling in 1992 at the time of the European Rate Mechanism debacle.
In an Opalesque Roundtable discussion of global macro, hedge fund manager John Burbank discussed the increasing importance and shift of private and institutional investors toward more global macro strategies. Burbank defined global macro as "having a reason to be long or short something that is bigger than a fundamental stock view".
Global macro trading
Global macro trading strategies are based on educated guesses about the macroeconomic developments of the world. Mike Novogratz, president of hedge fund Fortress Investment Group, discussed global macro trading in his video interview. Novogratz described global macro strategies as monitoring these macroeconomic stories, such as global imbalances, business cycles, the survival of the Euro, and changing growth models of emerging economies. He says that there is an inherent difference between global macro fund managers and traditional equity managers. Most long/short equity managers started in research as analysts and look to follow these macroeconomic stories based on what positions they believe in and stock positions they rely on.
On the other hand, global macro traders and managers come primarily from the risk side of trading. For macro traders and managers, the primary element in decision-making is risk, because when investing in such a speculative world there are so many risk factors and moving data points that they must take into account. Macro traders are not fundamentalists; they rely on risk management and staying liquid to avoid a liquidity crisis. In 2007 and 2008, with the credit bubble where there was a long period of low volatility and illiquidity, many global macro funds found themselves with liquidity problems.
Other experts, including Neil Azous, the Founder and Managing Member of Rareview Macro LLC, explains that Global Macro Trading is grouped into three strategies: Discretionary, Commodity Trading Advisor (CTA)/Managed Futures, and Systematic. As noted by Azous:
- Discretionary Macro execute their strategies by deploying directional positions at the asset class level to express a positive or negative top-down view on a market. Of all of the strategies, discretionary macro provides the most flexibility, including the ability to express either long or short views, across any asset class, and in any region.
- CTA/Managed Futures use products very similar to those that discretionary macro managers trade. However, the methodology in which they arrive at those long or short positions are very different. CTA’s apply priced-based trend-following algorithms to the trading of futures contracts.
- Systematic Macro is a hybrid between discretionary macro and CTA/managed futures. The signals that are used to enter into positions are based upon fundamental analysis, similar to discretionary macro, but the deployment of those trades is based on a systematic, or model-driven process, as is the case with CTAs.