Like any hedge fund strategy, global macro can be categorized into substrategies. The four basic approaches of global macro are discretionary, systematic, high frequency, and commodity trading advisors (CTAs).
Discretionary and systematic macro strategies both have the potential to be extremely profitable and are powerful methods of analyzing markets and determining investments. These are the two most often used global macro strategies but, because the four are often used together, it’s important to understand how all of them work.
Discretionary
Discretionary macro trading, as the name implies, relies on a trader’s experience, intelligence, and knowledge to take subjective and often risky bets on various global markets in order to capture alpha and the best possible risk-adjusted return. With knowledge gleaned from studying global data, releases, economic data, and central bank action, among countless other factors, an investor can frame a top-down approach. This allows for a unique analysis of the risks and opportunities offered by industries, sectors, countries, and the macroeconomic situation at large.
Discretionary strategy requires serious organization and processing skills, since it involves such a large amount of data. The ability to analyze data across many different markets aids the trader in assessing whether or not a particular market is fully incorporating all factors into global asset prices.
The discretionary macro strategy is nimble and can also produce alpha in significant risk off markets. One example of a trader using historical patterns to capture alpha this way is Paul Tudor Jones’s prediction of the Black Monday crash on October 19, 1987. Jones observed that the market behavior during that period could potentially experience a catastrophic crash. He expressed this view by going short and made an enormous return on Black Monday.
Global macro managers have the luxury of being able to trade a vast amount of markets and also to go against the trend, shorting the stock market while other hedge fund strategies and mutual funds remain long. Thus, discretionary traders have the potential to make a tremendous profit in a selloff, while equity managers tend to lose significant amounts of capital.
Discretionary macro traders may also determine trades based on direction and relative value. Directional trades are made in hopes of an asset moving in a particular direction. For example, if a manager is bullish he or she could go long copper and hope to capture returns on the move up.
Relative value trades aim to pair or group assets together to capture the relative value differential between those assets, and profit from a divergence or change in the price difference. Looking at the European crisis, if a discretionary macro trader believes that German yields will be less affected than Italian yields, the trader can short Italian five years and go long German Bobls. If matters worsen in Europe and Italy acquires more credit risk, it could see yields rise in relative terms.
