Macro Trading Strategies — What Are They? (Backtest)

Last Updated on December 17, 2022

“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.

At the end of the article, we provide you with an example of a macro trading strategy that is backtested. 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 crises, 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 (forex) — 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.

The best strategies can be found in our….

Strategy Shop

Backtested trading strategies

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 (not necessarily returns) 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, Soros 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 (see here for short selling strategy) 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 (you might also find the Ray Dalio All Weather Portfolio interesting)
  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 (Jim Rogers trading strategy). 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.

Global macro strategy hedge fund example: Brummer & Partners

In Europe, one of the more successful systematic macro firms is the Swedish hedge fund group Brummer & Partners based in Stockholm. They are specializing in taking on small groups of traders and managers that can complement their existing portfolio of managersand strategies. As indicated earlier in the post, hedge funds are very keen on managing risk because many of their clients already have great exposure to stocks, and the aim is to create alpha that is not correlated to the stock markets. Furthermore, many of the clients are already wealthy and they want to preserve what they have – they are not going for the jugular.

Brummer has at all times between 7 to 12 management teams trading different strategies and systems. As of writing, Brummer has the following five trading strategies:

  • Long/short equities
  • Systematic equities
  • Systematic macro
  • Systematic trend
  • Discretionary macro

Let’s look at the performance metrics and statistics of Brummer:

Macro trading strategy (Brummer backtest and example)

As a backtest, let’s look at how the macro trading strategies of Brummer have performed.

Brummer is making sure they have a diversified group of managers and strategies. So far, this strategy has panned out reasonably well:

Both the solid and dotted red lines show pretty consistent performance compared to the bumpy ride in stocks (grey line). The dotted line is the standard Multi-Strategy with leverage.

By investing in Brummer’s Multi-Strategy, you have avoided much of the gut-wrenching drawdowns in the stock market. We have covered the importance of having diversification and uncorrelated strategies in many other articles:

Brummer typically also adds a CTA strategy where they add trend-following strategies (yes, trend following strategies still work).

Macro trading strategies backtest example

One of the most important macro numbers is the US Friday job report that is published monthly and usually on the first Friday of the month. It’s published by the US Department of Labor. The report’s main numbers are nonfarm payroll employment and the general unemployment rate. However, the report has many numbers and is several pages long.

We made a backtest on S&P 500 (SPY) where we enter at the open and exit at the close of the day of the Job report. The equity curve looks like this:

Macro trading strategy backtest

The statistics tell us there are 343 trades and the average gain per trade is 0.07%. It’s a small gain, but still significantly more than the performance statistics on any random day. With an extra filter, this strategy can be tradable.

The backtest above is just one example of what we do in our weekly strategy report (including code).

The backtest above was done in Amibroker:

Macro trading strategies are difficult

We don’t trade macro ourselves.

The reason is simple: it’s extremely difficult due to a number of reasons. The main reason is that this is driven by more or less random macro events. There is news practically every hour and you are at the same time competing against clever people with much more resources than you have. To better understand our arguments, please read our previous take on the issues:

Additionally, macro trading is a zero-sum game. Why compete against smart people in a market where you really have no trading edge (what is edge in trading)?

We think it’s a better idea to focus on stock trading strategies. They are more predictable due to the long-term bias up – something you can utilize in an overnight trading strategy. Stocks tend to go up due to inflation and increased productivity, and thus you have a tailwind you don’t find in many other asset classes (with the exception of gold and perhaps crypto in the future).

FAQ (frequently asked questions) macro trading strategies

Q: What is macro trading?


Macro trading is a trading strategy that focuses on large-scale movements in the global economy. It involves analyzing the macroeconomic and political factors that could affect asset prices, and making trades based on those factors. Macro traders focus on macroeconomic indicators such as GDP, inflation, unemployment, and central bank policy. They also look at geopolitical events, political developments, and cross-border relations.

Q: What are some common macro trading strategies?

Some common macro trading strategies include trend following, carry trading, and hedging. Trend following involves taking a long or short position in an asset based on its current trend. Carry trades involve borrowing in a low-interest currency and investing in a high-interest currency. Hedging involves taking a position that is opposite to an existing position, in order to reduce risk. Other strategies include arbitrage, market timing, and global macro.

Q: How do I get started with macro trading?

Before getting started with macro trading, it is important to do research and understand the macroeconomic and political factors that can affect asset prices. It is also important to understand different trading strategies and to practice with a paper or virtual trading account before investing real money. Additionally, it is important to understand the risks associated with macro trading, including the potential for large losses.

We recommend backtesting all your trading ideas. If you don’t backtest, how do you know if you have a trading edge?

Q: Are there any risks associated with macro trading?

Yes, there are risks associated with macro trading. Macro trading involves taking positions in assets with the potential for large losses.

Additionally, macro traders must be aware of political and economic events that could affect the markets, since these events can be unpredictable and can lead to large losses. Therefore, it is important to understand the risks before investing.

However, almost all macro traders use some kind of quantified trading rules based on backtesting.

Q: What are the advantages of macro trading?

The advantages of macro trading include the potential for large returns, the ability to take advantage of global macroeconomic events, and the potential to diversify a portfolio. Additionally, macro trading can be done with a wide range of assets, including stocks, bonds, currencies, and commodities.

Macro trading strategies can add tremendous diversification to an equity investor due to uncorrelated returns. This is why wealthy people like to diversify into hedge funds.

Q: What is the difference between macro trading and other strategies?

The main difference between macro trading and other strategies is the focus on global macroeconomic and political events.

Unlike other strategies, macro trading requires a deep understanding of the global economy and how different events can affect asset prices. Additionally, macro traders take positions in a wide range of assets, so they can diversify their portfolios more easily. The latter point is, by far, the most important point.

Macro trading strategies – conclusion

Macro trading strategies are mainly for hedge funds and other institutional traders. Because of the difficulty of finding profitable data-driven and backtested trading strategies in this market, we don’t recommend macro trading. We believe the best odds of success are by sticking to the stock market. Leave macro trading strategies to the big players.

Similar Posts