A lot is made of relative returns and how one strategy or fund does against the SP500. While not the best benchmark for something like Global Macro it is nonetheless the benchmark that everyone is most familiar with and that is used the most on CNBC and in magazines. So how does global macro stack up to the SP500?
The chart below shows how $1000 invested in the SP500 and the Barclays Global Macro Index would have done for YTD for 2009. As you can see the SP500 while getting off to a rocky start is now leading the macro index by 9.68% so far. While the performance of the SP500 has been impressive the other side of the story is that to get the 18.04% return in the SP500 you first had to go through a -19.56% drawdown in January and February to get it. Contrast that to the Global Macro Index where you had a -2.06% drawdown and a 6.63% return YTD. Yeah you are outperforming with the SP500 but the volatility has been huge. (click on chart to enlarge)
Barclays Global Macro Index vs SP500 2009 YTD
Of course nine months is not usually the best representation of a strategy. Going from 1997 to the end of September 2009, how has the SP500 done in absolute and relative terms? Since 1997 the SP500 has given a total return of 42.70% and a CAGR of 3.07%. The Global Macro Index on the other hand has delivered a total return of 237.91% in the same time and a CAGR of 10.92%. Looking at the chart below you can see that while the SP500 has periods of serious out performance, over time it has lagged in a big way. (click on chart to enlarge)
Barclays Global Macro Index vs SP500 1997-September 2009
Not only has the SP500 lagged in total return but when looking at the risk taken to achieve the anemic 42.7% you really have to step back and rethink a long only equity approach. In fact if you have been in a SP500 index fund since 1997 we excuse you to go bang your head against the wall for a few minutes. Once you are back look at the chart below of the drawdowns that you had to endure to get that awesome 42.7% total return. Yes, you see two drawdowns over -45% each. In 2002 we were down -46.28% and in early 2009 we were down -52.56%. All this for a return that was not much better then sitting in T-Bills. (click on chart to enlarge)
SP500 Drawdown 1997-September 2009
Looking at the same chart for the Global Macro Index below we can see that the drawdowns are far lower and shorter in duration. In fact the worst drawdown that we have seen so far is -6.42% in October 2008 and right now we are at new equity highs while the SP500 is still -31.78% below its highs.(click on chart to enlarge)
Barclays Global Macro Index Drawdown 1997-September 2009
Does this mean that everyone should go out and invest all their money in global macro and buy our weekly global macro newsletter? No, on the first and yes on the latter. All kidding aside what this does show is the fallacy of long only equity investing. While being 100% invested in equities is great when they are moving higher you get absolutely crushed when things come crashing down. In global macro you are not beholden to the possibility of equity risk premia but instead are able to look for the best risk to reward opportunities out there in any asset class. This includes stocks, bonds, commodities, currencies, and more. This flexibility to go where the best opportunities are enables the global macro investor to outperform not in any given year but in a full market cycle.
Disclaimer-We are a global macro research company and are therefore a bit biased in our investment views.
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Title: macro trading vs SP500 1997-September 2009