Breaking Down Global Macro Hedge Funds
Defining a Global Macro Hedge Fund
Global macro hedge funds typically build portfolios based on broad economic and political views of countries/regions and commodities. These views may surround specific events or long-term secular themes. Examples of these events include interest rate changes, elections, tariff announcements, monetary and fiscal policy changes, and currency pegs.
To build their portfolios, global macro funds typically utilize forwards and futures contracts, as well as options and other exotic derivative products and cash (non-derivative) products. Macro investors can trade across equities, fixed income/interest rates, credit, commodities, and currencies. While these strategies are complex and involve inherent risk, they can help widen the investable universe for macro investors. Many macro funds will have specialists dedicated to trading individual areas and will allocate capital to different traders depending on the opportunity set.
Types of Global Macro Strategies
Currency-based, interest rate-based, commodity, and stock index-based trading strategies are commonly used by global macro funds.
In currency-based strategies, funds often look for opportunities based on the relative strength of one currency vs another. Funds track and forecast the fundamentals and monetary policies of the underlying local economies, and use futures, forwards, options, and spot transactions to attempt to profit from their view.
For interest-rate strategies, the fund will trade sovereign debt, making both directional and relative value bets on the country's monetary policy, economy, and political condition. Directional trading refers to a trade based on the country’s outlook where one goes either long or short a financial instrument, thereby directly exposing themselves to moves in that asset (e.g. interest rates will go up or down). Relative value trading, also known as “pairs trading”, occurs when one takes offsetting long and short positions on two securities thereby hoping to exploit a mispricing between the two assets (e.g. short term rates will rise relative to long term rates or US rates will decrease relative to German rates). This strategy is commonly implemented with U.S. Treasuries, European debt securities, and the debt of developed and emerging countries.
Under stock or equity index trading, a global macro fund analyzes the equity index of a given country employing futures, options, and exchange-traded funds. The securities used in this strategy are highly liquid, which allows them to be easily traded. Traders can either take a directional view (e.g. stocks will go up or down) on global markets or trade different markets or sectors on a relative value basis (e.g. Nasdaq vs Dow; US vs Europe; or Financials vs Technology).
Commodity trading strategies look to capture moves in fungible goods such as energy, agricultural products, precious and base metals, and other basic materials. Once again, these strategies can be traded directionally or on a relative value basis (e.g. WTI vs Brent Crude).
Business Standard, July 2016, “Global research houses revise commodity price outlook upward”
Investopedia, August 2021. “Directional Trading.”
Investopedia, February 2021. “Relative Value Fund.”
Investopedia, October 2020. “Global Macro Strategy.”
Types of Global Macro Hedge Funds
Global macro hedge funds can be managed as commodity trading advisor (CTA), systematic, or discretionary hedge funds. These types are differentiated by how the hedge fund trades its portfolio and bases its decisions. At a high level, CTA and systematic global macro hedge funds both use algorithms in their portfolios.
When CTA global macro hedge funds construct their portfolio(s), they usually employ price-based and trend-following patterns and execute trades. Both price-based and trend-following algorithms rely on the quantitative patterns in the market to find mispricing opportunities. These strategies typically leverage algorithms to take positions, but can be implemented by human traders as well.
Systematic global macro hedge funds use fundamental analysis to construct a portfolio but execute the trades with algorithms. This type of fund uses both quantitative and qualitative market data to construct a portfolio and deploy their trades. It is often thought of as a hybrid between CTA and discretionary global macro hedge funds.
Discretionary global macro hedge funds differ from systematic funds because, instead of relying on algorithms for portfolio construction and execution, discretionary funds rely on a portfolio manager to construct the portfolio and a trader to execute the positions. This is where the term “discretionary” is garnered, as it pertains to the portfolio manager’s discretion with the portfolio. These traders closely follow monetary and fiscal policy leaders in an attempt to “read the tea leaves” on where markets are headed.
Environments for Global Macro Hedge Funds
Global macro hedge funds are fairly diversified, given that the portfolios trade in various asset classes and instruments denominated from different countries and seek returns from economic and political changes. Suffice to say, global macro hedge funds prefer market volatility to find mispriced opportunities.
In the 2021 environment - recovering from a life-changing pandemic and economic shutdown along with unprecedented government stimulus, global macro hedge funds saw the set up for opportunities to implement in their portfolios.
Despite the continuation of quantitative easing by central banks, global macro hedge funds hold a favorable outlook for the months to come. Akshay Krishnan, head of the macro and relative value strategies at Stenham Asset Management, notes “looking ahead into next year the rubber will meet the road on important questions around inflation being transitory or not and the extent to which various countries will reopen and economic activity picks up.”
Global macro hedge funds saw inflows in 2021, following outflows in 2020, highlighting investor sentiment for the strategy.
Hedge fund asset flows ($bn) through May 2021 by investment strategy
AIMA, July 2021, “Investor Intentions H2 2021”
Hedgeweek, August 2021. “Macro hedge funds primed to capitalize on market trends amid fragmented global recovery.”
Financial Times, September 2021. “Macro hedge funds find 2021 has not gone to script.”
Now, with respect to 2022, we’re experiencing an environment that is really conducive for macro hedge funds. Markets to date have been rattled by surging inflation and sustained volatility, coupled with tightening fiscal and monetary policy. As former Soros investor Scott Bessent puts it, “We are now seeing a series of longstanding economic, political, monetary and portfolio management systems breakdown”. This breakdown is providing a new paradigm for global macro investors.
Through the first quarter of 2022, the latest data available, Global Macro Hedge Funds received the largest influx of flows among the various hedge fund strategies. This figure amounted to approximately $40 billion of fresh capital, propelling the hedge fund subsegment to reach $677.8 billion in total assets under management.
Macro hedge funds’ portfolio construction offers investors access to a myriad of different financial products which are traded in various global markets. While these funds employ strategies that are complex and involve inherent risk, they can provide a differentiated source of return and a potential hedge against market volatility, given profits are generated around mispriced opportunities from macroeconomic themes.
Global macro hedge funds generally trade highly liquid securities, allowing them to act nimbly as market events unfold. They are structured in various ways to allow investors the opportunity to find the appropriate strategy for their portfolios. Today, with the many market variables at play, a macro-oriented approach to investing, helmed by seasoned market veterans, may offer investors a way to diversify portfolios and capture the momentum fueling these managers.