Global macro is known as one of the most flexible and opportunistic investment strategies. In simple terms, global macro funds aim to capitalize on market mispricings through a top-down big picture view, believing that certain areas are not adequately reflecting fundamentals and trend changes, and take action before the majority of market participants notice the opportunity. Before diving into quantitative global macro strategies, it’s important to understand the two main styles of global macro investing – Discretionary and Systematic. Discretionary relies more on experiential judgment while Systematic focuses on rules and discipline. On the quantitative side, global macro strategies differ from typical quant funds in two main aspects…
Global macro funds use macroeconomic data as factors
Typical quant strategies use bottom-up securities-specific data as factors, while global macro strategies utilize macroeconomic fundamentals such as GDP, inflation, employment, monetary policy, yield curve, trade flows, exchange rates, commodity supply/demand/inventories, various indexes and VIX. Related quant models examine relationships between fundamentals and market prices, in addition to basic factor regressions. For example, digesting new macro releases with Kalman filters to make equity market calls, as general analysts don’t consider top-down macro signals.
Global macro funds trade across diverse asset classes
Regular quant funds select within a single asset class, most often stocks. Global macro funds can go long or short across various asset classes globally, as long as sufficient liquidity exists. Equities, bonds, commodities, currencies across different regions are all potential targets, leaning towards tactical asset allocation. An increasing number of global macro funds also combine bottom-up quant stock selection within asset allocation.
Both discretionary and systematic styles have pros and cons
When fundamentals reliably predict prices and markets are calm, systematic global macro tends to thrive. When fundamentals fail to capture prices or markets get disrupted, discretionary’s nimbleness helps. Many funds use a blend. While systematic discipline is gaining popularity, discretionary judgment sometimes gets it right predicting key macro events. Overall, global macro’s low correlation to markets is a huge advantage in diversified portfolios.
Global macro investing utilizes macroeconomic data and trades across diverse assets through discretionary judgement or systematic rules. It aims to capitalize on mispricings from a top-down perspective. Both styles have pros and cons and are often blended in practice.