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

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

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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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.

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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.

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%.

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.

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Our stock market risk index did not change this week and remains at 25%. In simple terms the lower the reading the more bearish we are and the higher the reading the more bullish we are. As you can see in the chart we have been fairly bearish for most of the year.

Most of the economic indicators we follow are very bearish, the trend is down, breadth is poor, and money flows are negative.  On the bullish side sentiment is at extreme lows and valuations continue to improve.  We expect a rally here in the next few days but long term are still fairly bearish.

Happy Trading,

The Macro Trader

P.S. If you want to ensure that you receive every update make sure and subscribe by RSS or E-mail by clicking on the RSS button on the right hand side of the page.

P.S.S. This is usually posted by Monday of each week but due to travel delays it was late this week.

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“I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: Fundamentals, Technicals, and Market Tone. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.”

-Michael Marcus

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