Global Macro and the Art of Trading Themes
Over the last thirty years global macro investors have been some of the most consistent and successful investors in the world. I fact as a group they have the highest Sharpe ratio of any trading style in most hedge fund databases. In this article we will go over a few of the different reasons why this is.
Global macro investors trade anything anywhere. Simply put global macro is a very opportunistic way of trading and allows you the freedom to find the truly great risk to reward opportunities. While some traders focus on one segment of one market, the global macro investor looks at all segments of all markets. By using models, and years of experience the global macro investor is better able to find pricing anomalies in different securities.
Another factor that separates the global macro investor from many of his trading brethren is that he or she uses very strict risk management rules. The idea for this likely came as more traders left the pits and were sick of seeing people blow their accounts up due to leverage. If you trade levered up and do not cut your losses quickly then you will eventually go the way of the dinosaur and disappear with no money. So risk management is very key to the global macro investor’s success.
Now that we have discussed the opportunistic behavior and the risk management aspect of global macro trading we will talk about another major benefit of global macro trading. The next best thing about global macro is that you can trade an entire investment theme. From start to finish you can trade the appropriate instrument, or instruments to best capitalize on the theme.
So instead of only trading part of the theme, wouldn’t it be nice to be there for the whole thing? You can trade through the whole cycle and likely make a lot more money then just looking for the next idea.
On the other hand if you are a global macro trader you can take advantage of the entire path. If you saw the housing bubble coming you could short the homebuilding stocks, then go and short the mortgage backed securities, then go long Treasuries as the Fed lowered interest rates, and then finally you could come back and buy some of the mortgage backed securities when they became very beaten down and cheap.
The path makes sense and yet we see trader after trader just stick to one asset class and not take advantage of all the opportunities out there. If you are successful at trading and therefore have a solid respect for risk, you can become a good global macro trader.
The benefits and profitability of thematic trading is very strong. Why traders and investors leave half the money on the table is beyond us and we would encourage you to look at what you can do, at what you have researched, and where else along the curve can you trade it and profit from it.
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