Macro Momentum Trading Strategy (13% Annualized Returns Since 1970)
The systematic global macro investment style, labeled Macro Momentum, is grounded in economic theory and aims to capitalize on the tendency of market participants to underreact to news by positioning on the basis of fundamental macroeconomic trends.
In general, such strategies are called a macro momentum trading strategy.
Below, we present and summarize the results from a 2017 white paper titled “A Half Century of Macro Momentum,” authored by Jordan Brooks.
Related reading: Macro index trading strategy
Core Investment Rule (Macro Momentum)
The strategy involves going long assets for which fundamental macroeconomic trends are improving and short assets for which fundamental macroeconomic trends are deteriorating.
Macroeconomic Themes (State Variables)
The strategy focuses on four macroeconomic state variables (or themes) that impact the considered asset classes:
- Business Cycle
- International Trade
- Monetary Policy
- Risk Sentiment
Summary of Key Signals and Asset Class Relationships
The direction of the signal (bullish/positive (+) or bearish/negative (–)) is asserted based on the fundamental trend measures:
| Macro Momentum Signal | Equity Indices | Currencies | Gov Bonds | Interest Rates |
| Increasing Growth (Business Cycle) | + | + | – | – |
| Increasing Inflation (Business Cycle) | – | + | – | – |
| Increasing Competitiveness (International Trade) | + | – | – | – |
| Policy Tightening (Monetary Policy) | – | – | – | – |
| Improving Risk Sentiment | + | + | – | – |
Note: For fixed income (Government Bonds and Interest Rates), most improving fundamental trends are considered bearish signals, as they typically correspond to inflationary pressures or rising interest rates.
Portfolio Construction
The systematic approach aggregates 32 asset class-theme portfolios, formed using two portfolio types:
- Long-Short Portfolios: Take long/short positions relative to the cross-sectional average and are designed to be market neutral at all points in time.
- Directional Portfolios: Take long positions in assets with favorable trends and short positions in assets with unfavorable trends, designed to be market neutral on average.
The Aggregate Macro Momentum portfolio is formed by taking an equal weighted average across all 32 asset class-theme portfolios. Each of the 32 components is scaled to 10% forecasted annual volatility.
The Assets Involved (Universe)
The strategy is applied across four major global asset classes:
- Global Equity Indices
- Global Currencies (FX)
- Global Government Bonds (ten-year maturity)
- Global Interest Rates (three-month maturity)
The simulated historical data extends back to 1970, although asset class start dates vary.
Key Markets Included (with approximate start dates):
- Equity Indices (Starting 1970): Australia, Germany, Canada, Spain, France, Italy, Japan, Netherlands, U.K., U.S..
- Government Bonds (Starting 1970): Germany, Canada, U.K., U.S..
- Currencies (Starting 1971): Germany, Japan, Switzerland, U.K..
- Interest Rate Futures (Starting 1987): U.S..
Performance Results (1970–2016)
The hypothetical Macro Momentum strategy demonstrated consistent performance over nearly 50 years, a period containing multiple recessions, wars, stagflation, and financial crises.
Full Sample Performance (Jan 1970–Dec 2016):
| Metric | Aggregate Macro Momentum |
| Annualized Excess Returns | 13.0% |
| Volatility (Annualized) | 10.7% |
| Sharpe Ratio (Annualized) | 1.2 |
| Correlation to U.S. Equity Market | -0.22 |
| Correlation to U.S. 10y Bond Returns | 0.03 |
The strategy realized positive annualized excess returns and Sharpe ratios over every simulated decade.
Performance During Market Stress (Diversification)
The strategy exhibits attractive characteristics during periods of market stress, providing beneficial diversification to a traditional 60% equity/40% bond portfolio.
- Equity Market Drawdowns: Macro momentum tends to have a negative beta to equities in down-markets and a positive beta in up-markets, demonstrating a pronounced ‘smile’ relative to equity returns. In the ten worst quarters for equities since 1970 (equities averaged -19.9%), macro momentum returned an average of 13.7% in excess of cash.
- Rising Real Yield Environments: Macro momentum appeared robust, posting gains in eight of ten extreme rising real yield episodes since 1970. During these episodes, the strategy achieved average annualized excess returns of 12.0%. This contrasts with a canonical 60/40 portfolio, which exhibited anemic excess returns of around 1.1% annualized during these periods.
Comparison to Other Alternative Strategies
Macro momentum is related to, yet diversifying from, other alternative risk premia.
| Comparison | Aggregate Macro Momentum | Trend-Following | Diversified Style Premia (Value, Momentum, Carry) |
| Full Sample Sharpe Ratio | 1.2 | 1.1 | 1.0 |
| Correlation (to MM) | N/A | 0.4 | 0.2 |
The combination of Macro Momentum and Trend-Following (50/50) yielded a Sharpe Ratio of 1.4, demonstrating non-trivial improvement in risk-adjusted returns. Furthermore, when one strategy experienced its largest drawdowns, the other strategy typically realized positive returns. For instance, during the largest macro momentum drawdown (April 1999 to December 2000), macro momentum detracted 22% while trend-following gained 17%