Macro strategies are known for their flexibility and opportunism in the investment world. They take a top-down, bird’s-eye view approach and seek to capitalize on market mispricings before the majority discovers them. There are two main styles of macro investing: discretionary and systematic. The discretionary style is like thematic investing, identifying a macro theme and related views before implementing them in instruments. The systematic style resembles quant strategies, emphasizing rules and disciplines in models relating macro fundamentals like GDP and yields to asset prices. Common strategies include trend following, econometric models relating fundamentals and prices, global asset allocation, contrarian trading, and arbitrage. Key concepts are having a written methodology and risk management. Classic books like Market Wizards interview top macro traders and reveal their principles. Overall, macro strategies tend to have low correlation to markets, providing diversification.
Discretionary macro strategies are flexible but rely on subjective judgements
The discretionary macro style is freer flowing, relying more on experience and judgements to form a macro view. For example, one might forecast Chinese growth slowing, thereby hurting commodity demand and prices. This top-down view can then be implemented in instruments like shorting the Aussie dollar or oil futures. Discretionary strategies tend to take large positions in a few instruments for flexible holding periods. Their flexibility can allowquick reactions to major macro events, as George Soros displayed in breaking the British pound. But the reliance on subjective judgement over formulas also exposes discretionary strategies more to behavioral biases.
Systematic macro strategies emphasize rules and discipline
In contrast, systematic macro strategies closely resemble quant strategies in their emphasis on rules and disciplined models. Common factors include macro fundamentals like GDP, inflation, and commodity inventory data instead of bottoms-up company factors. The models relate these top-down factors to asset prices and seek to exploit any lags in adjustment. For example, a model might buy stock indices after observing an uptick in GDP before the broader market reacts. Systematic strategies tend to hold more diversified portfolios over longer periods. Their rules-based nature aims to remove individual emotions and biases. Trend following rules, econometric models for tactical asset allocation, and intermarket arbitrage strategies are common in systematic macro investing.
Key principles are having a written methodology and risk management
Despite differing styles, certain principles are shared by successful macro practitioners. Nearly all highlight the importance of having a written trading methodology to remove ambiguity and emotions during trades. Stop losses are widely implemented, usually around 10% thresholds. Trading the trends and contrarian, reversal strategies are also common. Though uncommon in systematic investing, macro traders incorporate fundamentals, technicals, and qualitative elements like positioning and market dynamics into their research. Their flexibility lets macro traders go anywhere, toggling between long and short positions across diverse instruments like equities, rates, FX and commodities. This diversification means their returns often have low correlation to traditional markets.
Books like Market Wizards reveal strategies of famous macro traders
There are many excellent books that interview famous traders and reveal their principles. Jack Schwager’s Market Wizard series profiles discretionary greats like Paul Tudor Jones and Bruce Kovner who dominated markets with bold macro trades. Books like Trade Your Way to Financial Freedom by Tharp cover systematic trend following systems. Speculators like George Soros and Stanley Druckenmiller tell their stories in The Alchemy of Finance and The New Market Wizards. There are also books dedicated to specific macro strategies, like global macro, event-driven, relative value arbitrage, and contrarian trading. While providing diverse perspectives, the best traders consistently emphasize having a methodology, risk control, and learning from mistakes.
Macro strategies tend to have low market correlation, providing diversification
A key benefit of macro strategies is their low correlation to traditional markets. As passive and factor investing gained prevalence, correlations between assets rose. But macro strategies are unconstrained and their positioning fluctuates with shifting opportunities. The chart below illustrates the low correlation between a macro hedge fund index versus the S&P 500. Though difficult to master, the diversity provided by macro strategies can improve portfolio returns while dampening volatility. The early farmers in Chicago who hedged crop prices based on weather patterns were using a discretionary macro approach. In many ways, macro trading takes investing back to its roots in real economy fundamentals.
Macro investment strategies take a top-down approach to seek profits from market mispricings of economic developments. They come in discretionary and systematic styles. Key principles shared by successful macro traders include having a written methodology, risk control, and learning from mistakes. The flexibility of macro strategies means their returns tend to have low correlation with traditional markets, providing diversification. Books like Market Wizards reveal the principles of famous macro traders.