Macro Is Dead, Long Live Macro

If you read the popular financial press you may be led to believe that because a few macro funds have closed down this year, a few legendary traders have closed their funds over the past few years, and because global macro as a category has done poorly post-crisis that macro is dead.  If we have learned anything post-DotCOM bubble it is that when a strategy has died it is really just coming back to life.

Let’s address the above reasons for macro’s supposed death. The first is that a few prominent funds have closed this year. Everest, COMAC, and Fortress have or are closing their doors. They all got hit hard when the Swiss National Bank blew their EUR/CHF peg earlier this year. Everest basically blew up, COMAC decided to turn into a family office, and Fortress kept fighting the fight in public until announcing a few weeks ago that it is closing up its macro business. Here is the thing though, of the three only one lost “all” their money. COMAC was down something like -8% and decided to turn into a family office while Fortress appears to have been down around -17% before shutting its doors.  Have you EVER heard of a long only equity guy closing up shop after a -8 or -17% drawdown? Have you ever heard anyone say that “the SP500 should be shut down because in the 2000’s it has been down over -50% not once but TWICE? It is kind of ridiculous to extrapolate that an entire category of trading is dead because a few guys were down a bit and decided that instead of dealing with the press they would rather just deal with their personal account.

This segways nicely into our next point regarding “a few legendary traders have closed their funds over the past few years.” To think that macro is dead because Soros and Druckenmiller both returned outside money is ridiculous. Forbes has Soros net worth at like $25 billion and Druckenmiller at $4.5 billion. Now I have no idea if their true net worth is half the Forbes number or double the Forbes number but either way they both have billions, have both been working for a long time, and both can still trade, or not trade, while enjoying whatever they feel like enjoying.  And for those that want to say “but Druck was down -5% when he shut down his fund” my response is you’re an idiot. He returned 30%+ forever, all his investors had net gains, and for all you know by the time the year was closed out he was up double digits. Again being down -5% is not really a big deal. In fact the SP500 was down double digits just a few weeks ago…..and I didn’t hear anyone saying “this is proof that market capitalization weighted indexes have lost their touch.” Oh and in case you are wondering by all accounts Druckenmiller made a bunch of money in 2014 and so far in 2015 so I am pretty sure his “loss of touch” was more his “I am sick of shuffling papers I just want to hang out with my family, trade my own money, and watch the Steeler’s play football.

Investing is different from most other professions in that if you are at the top of your game going private gives you a better chance of outperforming than if you are in the public eye. If you are an athlete, musician, artist, doctor, engineer, etc. you need to see people and do things with people in order to know if you are any good or not. Trading is different in that at the end of the day you can see your returns and you don’t have to care if anyone else does.

The last point, at least for today, is concerning the idea that because global macro has done less than awesome post-crisis it is useless and must be dead. Remember 1998, 99, and 2000? Julian Robertson closed his shop, Warren Buffett was down -51%, and value investing was dead. Yeah I wonder how that turned out. Remember around that same time how commodities had done nothing for what some might refer to as “forever”? Over the next 10 years both value and commodities did awesome. By the way what do both Julian and Warren B have in common? They are both called “value” investors but they have also both traded commodities, derivatives, currencies, and anything else that represented “value” to them. At the same time we have someone like Joel Greenblatt who has always been a stock/bond value guy and a Bill Miller who runs equity only mutual funds.  All of these guys would be lumped into the same value bucket and yet they all invest wildly different and have very different business structures.

Some funds, macro and otherwise, have investors who want very low volatility and decent returns. If you are a pension fund that “needs” 7% a year over time then a 20% year is great but a -10% year is the end of the world. The pension funds goals are steady and consistent returns but they have no need for shoot the lights out performance. Other investors on the other hand give a manager a portion of their money and they expect high returns and understand that usually that entails the potential for more risk. There are many other classes of investors but these two will do in order to make this point. Most hedge funds these days, macro or otherwise, are not playing to the sound of the SP500. They are not in the business of playing to some benchmark that someone from the media picked for them. Instead they are trying to play to the benchmark that they have set with their investors. Some of the investors have no economic incentive to beat the SP500 but instead to match their liabilities…..and this is why, or at least a huge part of why, “hedge funds have under-performed” post-crisis.

With all the different strategies and business models inside of strategy categories it is stupid to lump them all together. One of these days I will write a larger post on why the media gets hedge funds wrong but this is one of the key reasons.

All this is a long way of saying, and I am not sure how well I said it, that global macro is not dead and can’t really die. As long as their are trends, and there always are, there will always be some people on the right side and others on the wrong side of them.

By the way we have seen reports of a lot of managers being up double digits even while other funds are struggling. In the case of our newsletter, and of course I have to tout it, we are up around 14% for the year. We are directional macro looking to take 5-15 positions long and short across stocks, bonds, commodities, and currencies at any one time. If this type of thing sounds interesting to you then please take a trial of our service.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

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Cult of the Guru and Independent Thought

You wont believe who said this….but more on that later.

Depression Not Recession

Depression Not Recession

To say that I read a lot of outside research from the sell side, buy side, independent shops, blogs, tweets, and whatever else I can find would be an understatement. I read about one actual book a week along with a gazillion pages and articles of research. I basically get paid to think, read, look at and model data, and……think some more.

That last part is of course key because it is what brings together everything else I do. Sadly I have found that far too many people, and in this case investors/traders, fail to do this. Too many people find a guru or two or three and then attempt to just follow what the guru does, or at least what the investor thinks the guru does. If you actually get to sit in the office with Buffett or Soros or someone similar day after day then maybe this strategy would work–although it probably won’t–but barring that it definitely will not.

We, and by we I hope I mean me and anyone reading this, study great investors to learn the how of what they do and not just what they are doing. I scour 13F’s as much as the next guy…..OK maybe a lot more, but the point remains that if you are not also thinking about both what the famed investor is thinking and whether any of this is applicable to your portfolio. then it is all for naught.

For example look at Warren B. Most people who claim to be following his methodology buy and hold stocks and claim that they are never going to sell. While this may or may not be a successful strategy–for most it ends up being mediocre–it is NOT where Warren B has actually generated most of his outperformance. It is also NOT what he has said to do.

We could go on for a few days on this topic, but the short version is that Warren B says that the ideal stock–sorry, in B terms, it is a company–is one that he never has to sell. Living in reality however WB has regularly bought and sold stocks. In addition he has done more than his share of workouts–in Graham/Dodd speak a workout is what most now refer to as Merger Arbitrage–not exactly a buy and hold forever deal. On top of all this he trades derivatives in massive size, has traded commodities more than once, and finally, at least for now, he gets investment deals that no regular person has a chance of getting into. How many of you did Goldman call up in the 2008 crisis? I was sitting by my phone, but it never rang.

All of this is not to rail on an aspiring Baby Buffett, in fact everyone should read all the Berkshire letters, the Buffett Partnership letters (his Hedge Fund), “How to Trade Like Warren B” by Altucher, “Buffett” by Lowenstein, and all of the academic studies and other books written on the guy. You will learn many things but two stand out. 1-Warren B is a great businessman but a lot of your beliefs about him are probably wrong and 2-You should now have learned enough to adapt parts of his philosophy to your own personality and become your own investor. Notice that I did not say “you can now follow Warren B’s every word and outperform.” The reality is that you can’t. You have to learn from but not worship the great investors.

In the end after you read or listen to anything from anyone but especially supposed “experts” you need to think for yourself.  Failing to do so not only guarantees that over time you underperform but likely makes you drastically underperform.

I love writing this letter and putting my thoughts down on paper. I run a model portfolio to keep me accountable for my official “trade ideas,” but I would hope that anyone reading it would think, read, think some more, and then make a decision about whether what I am saying makes sense to them as well as their portfolios before possibly doing anything.

Why am I all anti-guru all of the sudden? First of all, I have always been anti-guru worship. Second of all, I have had 4 conversations in the past few days regarding the comments of one of my guru heroes. Being unsolicited conversations I thought now a good time to explain my anti-hero worship and blind following.

Professionally my two gurus are undoubtedly Stanley Druckenmiller and Ray Dalio. They are amazing at what they do based on any measure. They make money in most up and down markets, have made more than just about anyone, are both macro, both wicked smart, etc. etc. Basically my goal is to emulate them……but in my own way.

If you are familiar with them, you have already recognized that while they are both macro, they go about things very differently and seem to have different strengths. Where Dalio is king of detailed economic research, Druckenmiller is king of risk taking and risk management.

Both are very much worth studying but guess what?…….They have both been wrong before and will be wrong again.  This is why it is critical that you think for yourself. Everyone, even the best, are wrong on a regular basis.

All this brings us to the next point: A few days ago Dalio came out saying that he expects more QE sooner rather than later. He then clarified what the news reported by writing on LinkedIn his views. Here is the link and it is worth reading for yourself.

The Dangerous Long Bias and the End of the Supercycle

He could be right, and he brings a well thought out case for why he thinks that more QE is on the way. However, I have read it a few times now and disagree with him. I went into why I disagree in the letter this week but let me show you how a guru cannot only be wrong but drastically so.

In my visits to the library in order to read old Barrons (it is both very enjoyable and very enlightening) I came across this article a few months ago (see graphic below). It was published October 12th 1992 by a young Ray Dalio who was then managing $1.5 billion instead of the $150+ billion he is now managing. If you look at the title and then at the date you might be literally laughing out loud. The 1990’s were a lot of things but a depression is not one of them.

Ray Dalio Depression Not Recession

Ray Dalio Depression Not Recession-Barrons October 12, 1992

In the article Dalio goes into why he thought that we were in the early stages of a new depression. Among other things he pointed to was that the Fed had already drastically cut rates and yet the overall economy remained weak.

As you can see in the chart below of the 10-2 yield spread, this piece, and Dalio’s view, came out right at peak Fed ineffectiveness. What I mean by this is basically right around the time that this piece was published, the Fed stimulus started to work, and we left the recession which means that not only was he wrong but he was wrong at exactly the wrong time.

10-2 Yield Spread 1988-1995

10-2 Treasury Yield Spread 1988-1995

As we now know the economy not only did not go into a depression but was actually in the middle of the best 20 year period in the US stock market history. Of course Dalio being a master of the craft must have figured this out since as you can see in the performance table below he proceeded to make a little bit in 1992 and kill it in 1993 (see table in the graphic below).

Bridgewater Pure Alpha Fund Returns

Bridgewater Pure Alpha Fund Returns-Source ValueWalk

Hopefully you see the value in independent thought. Here is a true master, or wizard if you prefer, calling for a depression in something as public as Barrons. He was not only wrong but drastically wrong. If you had blindly followed it, you would have missed some of the best years in market history.

Blindly following a guru, even a guru as good as Dalio, is a sure way to the poor house.  Please think for yourself in all things. Read research (shameless plug: this letter is a great place to find some) but in the end make sure that you agree with any trade idea you find here or anywhere else and that it fits with your current portfolio. Doing anything else is just a way to lose money in the long term.

As a not so side note you should always be thinking things through and making your own decisions. Doing anything else deprives you of learning…..and that sounds like something out of “Principles” by Dalio.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research

Global Macro Trading

After being the largest hedge fund strategy in 1990 representing 71% of the overall hedge fund assets global macro has shrunk and now only represents about 15% of total assets.  While most people assume that this dropoff in assets was due to poor performance the numbers actually show a totally different story.  In fact according to the Credit Suisse/Tremont Hedge Fund Indexes, global macro has been the number one investment strategy with a total return of 502% from 1994 through June 2009.  Compare that with a total return of 335% from long short equity or 321% from event driven funds.

Of course most investors also have a misguided perception that every trade is like the trade that “broke the Bank of England.”  That trade in 1992 made Soros and his Quantum Fund over $1 Billion in a few days and garnered a lot of publicity.  The funny thing is that in a study done later by the IMF it was shown that if anything hedge funds shorting the Pound actually dampened the effects.  And in interviews since it is obvious that while the position size was huge the realistic downside was not.  Yes, Soros had a $10 Billion position on that week but thats not the right way to look at it.  Instead he and his portfolio manager Stanley Druckenmiller figured that if they were wrong they would lose a few hundred million at worst and that if they were right they would earn a billion or more.  Anyone who has traded for any period of time will tell you that a trade that has a risk to reward ratio of 5:1 is a fantastic trade.  As you can see, not only did Soros and Druckenmiller not break a bank, but they also did not take a huge outsized risk.

So while most investors think that global macro is made up of a bunch of drunk cowboys that are always swinging for the fences the real stories, and the numbers behind them do not bear this out.  In fact if you look at what global macro has actually done you will see that macro traders are some of the best risk managers in the world.  In the chart below we have the Barclays Group Global Macro Index and the SP500.  Starting with $1000 from 1997 to the end of July 2009 the Global Macro Index delivered 219.77% with a worst case drawdown of 6.24%.  Contrast that with the SP500 which from 1997 tot he end of July 2009 only delivered 33.30% with a worst case drawdown of -52.56%. (click on chart to enlarge)

Barclays Group Global Macro Index Vs. SP500 Jan 1997-July 2009

barclays-group-global-macro-index-versus-sp500

The above chart shows how well that global macro has done in absolute terms since 1997 but what about the risk that they took to achive these results?  Well as you an see in the chart the dips in the macro index look a lot shallower and shorter then the dips in the SP500.  Looking at the actual drawdowns shows that this is in fact the case.

In the chart below we have the drawdowns of the SP500 and then the drawdowns of the Barclays Group Global Macro Index.  As you can see the SP500 has had two massive drawdowns in the last 12 years.  The SP500 dropped over -46% in 2002 and then dropped over -52% in 2008.  In fact as of the end of July 2009 the SP500 is still down over -36%.  Contrast this with the Barclays Global macro Index which has had a worst case drawdown of -6.42% and is currently only -3.22% away from new equity highs. (click on chart to enlarge)

Barclays Group Global Macro Index and SP500 drawdowns Jan 1997-July 2009

sp500-and-barclays-group-global-macro-index-drawdowns

As you can see the perception of the global macro trader as a gunslinging cowboy is anything but the truth.  Instead they are some of the most consistent and risk adverse traders in the world.  In fact some of the hedge funds with the longest, and best, track records are global macro funds.  Three of the best and longest running global macro funds are Soros and his Quantum fund which have delivered north of 30% annually since 1967, Bruce Kovner and Caxton Associates have delivered over 25% annually since 1983, and Paul Tudor Jones and his BVI Global Fund has returned 23% annually since 1986.  Obviously these are some of the best of the best but can you name three other fund managers with returns like this, that also follow the same basic strategy?

So what enables global macro to do so well when everyone else is rapidly losing money?  Global macro does well because of the fact that it is entirely opportunistic.  Macro does not pigeonhole an investor into US equities or emerging market bonds, or European event arbitrage.  Instead macro enables investors to go wherever and whenever.  By trading all four major asset classes not only can macro traders generate uncorrelated returns but can also see dislocations that other investors miss, or in some cases are forced to miss.  For example if a long/short equity manager thinks that we are on the verge of hyperinflation and wants to be long gold he has two different options.  He can go long companies that should do well in the face of inflation and then go short stocks that should do poorly.  The macro trader on the other hand has far more flexibility and can go long commodities, go long and short currencies, go short regular bonds, long TIPS, and can still go long and short stocks.  The opportunity set is much larger for the global macro trader then it is for the long/short equity manager.

Going forward we see no reason to believe that global macro will not continue to outperform.  When we are in a bubble and everyone is making money, macro will perform inline or slightly underperform, and when things go crazy and everyone else is losing money global macro will be generating positive returns.

Happy Trading,

Dave@TheMacroTrader.com

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10 Things You Can Do To Improve Your Trading In 2009

This list is based on conversations we have had with different traders over the course of 2008. Most of the items on the list are timeless trading principles. So, in no particular order, here are 10 things you can do to improve your trading results in 2009.

1. Focus on Risk Management — If you didn’t learn this principle back in the 2000-02 bear market, then it’s hard to feel bad for you now. Once again, the events of the past year have brought risk management to the front of most investors’ minds. This time, make sure it stays at the front. Your risk management process should include a position sizing model and a strict selling discipline. While there may be some exceptions, most successful traders make money by cutting their losers and letting their winners run. We’ve all heard this before . . . because it works.

2. Pay Attention to Process rather than Outcome — As you exercise proper risk management, you should also be focusing on your process. Most successful traders agree that you will have a lot of little losers and a lot of little winners, but that the bulk of your profits will come from a few trades each year. In our weekly newsletter that we send to clients, we see similar results: a lot of small winners and small losers and a few pretty big winners. For example, early in the year we did really well catching the bulk of the move up in gold. In March we caught the breakouts in most currencies against the dollar, and then at the end of October we caught the majority of the breakdown in the Euro. And the past few weeks we have caught the move in corporate bonds. Aside from those trades we had several small winners and losers. In fact over the summer we had a streak of 8 losing trades in a row. By applying risk management to those trades, we made sure that all of the losses were small. And by focusing on the process, we were able to catch some strong winners as well. Remember, in a vacuum, any trade is irrelevant, meaning that one trade does not affect the next trade. You must have a systematic process and apply it over and over. Yes, you will have losing streaks, but over time, process will allow you to generate strong consistent gains and miss fewer trades.

3. Be Consistent — This goes hand-in-hand with Process. It’s critical that you have a consistent, systematic process to look at and track your ideas. How many times have you had an idea, forgotten about it, then looked at a chart a few months later and noticed that you missed a 50% move? If you’re like most traders, that happens fairly regularly. By having a systematic process that you look at consistently and that you apply every day or week or even every month-consistently-you’ll be able to capitalize on your ideas in a timely manner.

4. Accept Imperfection (in other words, leave your ego at the door) — Anyone who says he never has a losing trade is either a liar or doesn’t trade. As traders and investors, we must accept the fact that we are dealing with imperfect knowledge; therefore, we will not have perfect results. If you can’t handle that, you are in the wrong business. Investors who are not able to admit when they are wrong may get lucky for a while, but they will inevitably blow up. Ego might be useful in some fields, but it is absolutely destructive to your trading account. The worst investors are the ones who can’t admit when they are wrong. On the other hand, many of the best traders in the world are only right about half the time, and they’re not shy about admitting their failures. They make money by focusing on risk management and by making sure that they are in good risk-to-reward situations, and they always have a predetermined point at which they will get out if they are wrong. Spend more time following their example and less time pretending you never make mistakes.

5. Search for the Best Risk-to-Reward Ideas – As you may have noticed, we focus a lot on an investment’s potential downside. At times, this will cause us to skip a good trade or be small when we wish we were big, but more often than not, paying attention to risk-to-reward saves us from otherwise large losses. We only take trades where the return significantly outweighs the risk involved. Looking for good risk-to-reward scenarios also enables you to be wrong more often and still make money. For example, if you have $10 and lose $1 four times in a row, then make $10 once, you have only been right once or 20% of the time and yet you are up 60%. By focusing on the relationship between risk and reward, you are better able to make outsized returns.

6. Make Your Research More Efficient — If you are like most traders, you fall into the trap of trading the same things over and over. While sometimes this works, a lot of times you trade that way because you can’t find any other good trading ideas. You can avoid this by finding services that you trust to give you a virtually endless supply of potential trades that fit your criteria. Because we offer a weekly newsletter with trading ideas in several asset classes, you may be saying “aren’t you just trying to get me to buy your product?” Yes, we are, but we are also sincere in wanting to help you find good trades so that you can generate positive and consistent returns. Many people look at newsletters and other research providers as marketing services just trying to take their money. While there are no doubt some unscrupulous firms out there, there are many firms like ours that do a lot of work to provide you with useful, actionable, and real trading ideas. Some traders balk at paying for research. Our answer to that is that you can make up the cost of our service with one good trade. Think about it for a minute. If you spend $395 a year for a research service and are able to get a few good ideas a year from it, you will recoup the cost several times over. Most active investors should subscribe to 1-5 services that fit their style or that fill gaps in their style.

7. Invest in Some Technology — Technology can take a few different forms. You can spend a lot of money on new computers, software, etc. Or you can invest time to learn how to best use your current tools. Most investors do not need a new system; instead they need to take the time to learn how to use what they have. If you already have a good computer, a charting platform/data provider, and Excel, you can do tons of analysis if you learn how to use them. Go take a spreadsheet class or buy a book. You will find that a lot of trade tracking and model building can be done in a piece of software that you already have. If you are already well versed in the use of spreadsheets but require more analytics, it might be a good idea to finally get that back testing, option analytics, or other software or data provider that you need to do further analysis. Basically, investing in technology means looking at what you are doing that is taking up your time and deciding what you can do to make it more efficient. The less time you need to spend scanning, updating, etc. the more time you can spend researching new ideas, the more time you’ll have to spend with your family-now there’s a great investment.

8. Research, Research, and a Bit More Research — This is fairly self explanatory: Most of the best investors in the world are voracious readers. They read about trading, security analysis, risk management, economics, general business, science, manufacturing, philosophy, math, etc. Essentially they read about everything. You would be surprised how many good trade ideas were born in a book or magazine that had almost no direct relationship to the idea itself. Of course the other benefit is that you also get a lot of ideas that are directly related to a potential trade. Continuing education is one of the best things that you can do to enhance your trading results. Research is just another name for continuing education.

9. Be healthy — Some people may balk at this idea, but the healthier you are the better you are able to focus and think. The better you focus and think, the better you can function. The better functioning you are, the more you can get done and the better you can trade. Aside from better functioning, you will also live a longer and more enjoyable life. Health has countless benefits. Invest in your health.

10. Be a Critical Thinker — Critical thinking is not the same as pessimistic thinking. Critical thinking is a mental process of discernment, analysis, and evaluation. Critical thinking allows you to find out the pros and the cons of an investment. It allows you to be objective and make more of the right decisions and less of the bad ones. Critical thinkers look behind the news, the PR, the spin, the figures. Critical thinkers look for bias, conflicts of interest, puffing, and spin. If all you see is the potential money you can make in an investment, then you need to start thinking critically. Doing otherwise will simply take money away from you and give it to someone else.

We could talk about each of these for hours. We could also make this list 100,000 items long instead of 10, but that would be a waste of your time and ours. Trust us, following these 10 points will help 99% of the investors and traders we know, and they will help you.

Happy Trading and Happy New Year,

The Macro Trader

P.S. If you want to receive our Macro Trading 101 course just put your e-mail in the box below.

Macro Trading vs SP500 1997-October 2008

Macro Trading has several advantages to regular trading or investing. Most people either are long only or they trade one asset class. Instead of focusing on one area of the financial markets, Global Macro Traders focus on the best risk to reward opportunities they can find regardless of asset class or whether it is long or short. By not tying ourselves to one source of returns we can better balance our risk profile with our return objectives. Global Macro allows one the flexibility to not be dependent on any one thing or be held hostage by the downside of a particular asset.

Here we are comparing the returns of the Barclays Global Macro Index against the SP500. As you can see the Macro Index has performed significantly better than the SP500 from 1997 through the end of October 2008.

Global Macro Trading Index

While the Global Macro Index is currently in a drawdown it is far smaller than that of the SP500. The SP500 is down -37.47% while the Global Macro Index is only down -7.14%.

SP500 and Global Macro Index drawdowns

Anyone that is still tied to the notion that all you need to do is buy and hold has lost money over the last 10 years. While we hope that investors are finally coming around to the idea of absolute returns and risk management, we also realize that investors by nature are irrational and that they will continue to repeat the same mistakes.

We here at The Macro Trader try to generate absolute returns because a relative loss is still a loss. If you are interested in learning more please send us an e-mail.

Happy Trading,
The Macro Trader

If you would like to receive our new FREE course “Macro Trading 101” put your e-mail in the box below.