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.
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Title: Global Macro Trading