Macro Trading Strategies — What Are They?

Last Updated on August 25, 2022 by Oddmund Groette

“If trading is like chess, then macro trading is like three-dimensional chess. It is just hard to find a great macro trader.” — Paul Tudor Jones. Many of the world’s biggest hedge fund managers and institutional traders focus on macro strategies. What are macro trading strategies?

Macro trading strategies are investment strategies that pick their holdings through informed notions about various countries’ macroeconomic and geopolitical developments. These strategies are mostly used by hedge funds and mutual funds, as they aim to benefit from tectonic shifts in a nation’s economic policies, international trade, or interest rate regime, as well as from major political situations across the globe.

Want to know more about global macro trading? Let’s dive in.

What is a macro level in trading?

In trading, the macro level refers to macroeconomic factors that affect the entire market of any nation or geopolitical region, rather than the fundamental factors affecting individual stocks and industries, such as company earnings, new products, patents, management, court cases, and regulations. The macroeconomic factors include stuff like a country’s level of debt, unemployment, inflation, and growth rate.

These are factors that determine the state of a nation’s or region’s economy and, by extension, how the markets (equity, commodity, interest rate, bond, and currency) would perform. Macro level analysis also considers the effects of other factors like economic crisis, pandemics, and natural disasters, such as tornadoes, hurricanes, and earthquakes.

When investing based on macro factors, the interest is in the entire market, and not individual stocks or commodities. For example, currency speculation — where traders try to identify a price relationship between currencies and then take advantage of it when mispricing occurs — is a popular form of macro-level trading. Another example is during the Covid-19 market downturn. Investors were not so much concerned about individual stocks that get hammered, as they were about the S&P 500 futures. Of course, they had no time to go through individual companies, but instead, would consider that the entire U.S. stock market could be hurt by a worldwide slowdown caused by the pandemic.

Thus, macro investment strategies are based on the interpretation and prediction of large-scale events related to national economies, history, and international relations. Such strategies typically focus on the analysis of interest rate trends, international trade and payments, political changes, governments’ domestic and foreign policies, inter-government relations, currency exchange rates, and other broad systemic factors.

Global macro trading strategies base their investments on educated guesses about the macroeconomic developments of the world, focusing on predictions and projections of large-scale events on the country-wide, continental, and global scale while implementing opportunistic investment strategies to capitalize on macroeconomic and geopolitical trends. If you like this style of investment, you may need to study Macroeconomics to understand how those factors affect the global financial markets.

Who is a global macro trader?

A global macro trader is one who uses global macro trading strategies — investing based on the analysis of interest rate trends, international trade and payments, political changes, governments’ domestic and foreign policies, inter-government relations, currency exchange rates, and other broad systemic factors, across countries, continents, and globally.

A typical global macro trader invests across sectors, assets, and markets, and does not restrict themselves geographically. They are hedge fund or mutual fund managers who study global markets worldwide and are aware that major macroeconomic or political events can have a ripple effect throughout the international markets.

One important thing about global macro traders and managers is that they focus primarily on the risk side of trading. The primary element in their decision-making is risk because when investing in such a speculative world there are so many risk factors and moving data points that they must take into account. Global macro investors are not mere fundamentalists; they are most interested in risk management and staying liquid to avoid a liquidity crisis. This is why most global macro managers participate in markets with high liquidity, such as currencies, interest rate futures, and equity index futures contracts, with judicious leverage.

George Soros, the famous billionaire investor, is a famous example of a global macro trader. He immortalized his name in global macro trading history when he forced the Bank of England to change its monetary policy in 1992. In that trade, he sold GBP in a highly profitable trade prior to the European Rate Mechanism debacle by applying a global macro strategy. Using the same strategy, Soros and many other global macro strategists reaped lots of benefits during the Asian Monetary Crisis that resulted in the devaluation of currencies like the Indonesian Rupiah and the Thai Baht in the late 90s.

How do macro funds make money?

Macro funds make money from their trades which can be long or short positions in different markets in different countries. Their trades can take the form of these:

  • Relative value/perceived arbitrage: This implies simultaneously buying and selling a pair of assets (pair trading) that are somewhat related, with the expectation that their valuation spread will either contract (convergence trade) or expand (dispersion trade). Money is made from the difference in values when the positions are eventually closed. These kinds of trades are usually the most common type found in global macro portfolios.
  • Currency carry: Carry trade is another popular macro trade. It is a type of relative value or pair trade that involves shorting a currency whose country has a low interest rate (e.g., the euro) and using the proceeds to go long a currency with a higher interest rate (e.g., the Australian dollar or the US dollar). The profits come from the difference in the rates earned for holding a high-interest currency and that paid for selling a low-interest currency.

Global macro strategy example

There are different ways to apply the macro strategy. For instance, a global macro trader who believes the United States market is headed into a recession may choose to short sell stocks and futures contracts on major U.S. indices, such as the S&P 500 index futures. At the same time, they may see a big opportunity for growth in Singapore and decide to take long positions in that country’s markets.

Meanwhile, other macro investors may choose to invest in safe-haven assets during periods of crisis and therefore invest in commodities like gold. They may also invest in US Treasury bills/bonds or even choose to stay in cash in safe-haven currencies like the JPY, USD, or CHF.

Popular macro trading books

Many books have been written on macro trading strategies. These are some of the most popular ones:

  1. How The Economic Machine Works, by Ray Dalio
  2. Global Macro: Theory and Practice, by Andrew Rozanov
  3. Macro Trading and Investment Strategies: macroeconomic arbitrage in global markets, by Gabriel Burstein
  4. Applied Financial Macroeconomics and Investment Strategy, by Robert T. McGee
  5. Inside the House of Money: Top hedge fund traders on profiting in the global markets, by Steven Drobny
  6. The Invisible Hands: Top hedge fund traders on bubbles, crashes, and real money, by Steven Drobny
  7. Global Macro Trading (Bloomberg Financial) 1st Edition, by Greg Gliner
  8. This Time Is Different: Eight centuries of financial folly, by Carmen M. Reinhart & Kenneth S. Rogoff
  9. Manias, Panics, and Crashes: A history of financial crises, by Charles P. Kindleberger and Robert Aliber
  10. Devil take the Hindmost: A history of financial speculation, by Edward Chancellor

What is systematic macro trading?

Systematic global macro trading uses automated systems to trade the global financial markets based on macro strategies. It employs large quantitative data to predict meaningful underlying patterns across global economies.

In other words, this method aims to systematize the data into statistical models from which trading algorithms are created to monitor and trade various markets across nations and continents. Interestingly, well-developed models can profitably work in various markets and economies.

Global macro hedge funds

Global macro hedge funds are actively managed funds that try to profit from market fluctuations caused by geopolitical events, economic policies, and natural disasters. They bet on various events through different assets and instruments including options, futures, currencies, index funds, bonds, and commodities in order to maximize returns if the predicted outcome occurs.

A good example of a global macro hedge fund is the Quantum Funds, which is a private investment management firm founded by George Soros and Jim Rogers in 1973. Quantum Funds is driven by a global macro strategy. It makes massive speculations on the price movements of currency, stocks, bonds, commodities, derivatives, and other asset classes in line with its macroeconomic analysis.

Famous macro trading hedge funds

The largest and most famous macro trading hedge fund is the Bridgewater Associates, a hedge fund founded in 1975 by Ray Dalio. The fund follows a systematic investment approach that is based on a core global macro strategy, with an in-depth perception of economies and markets’ operations across the globe.

The firm trades in more than 50 liquid global markets and five asset classes. It uses Bridgewater’s market timing experience, capturing risk premiums and portfolio construction. Its macro strategy is a blend of two of Bridgewater’s flagship strategies — All-Weather and Pure Alpha Major Markets — which infuse into one macro portfolio that is highly diversified.

Macro trading strategy (backtest and example)

A backtest of a macro trading strategy is coming soon.

Similar Posts