Global Macro Versus The SP500 And The Winner Is…….

Today in the Financial Times there was an article entitled “Macro Funds Miss Out On Crisis” where they show how many macro funds are currently lagging their expected performance so far for 2010.  While it is true that many funds are relatively flat e are surprised that the article had nothing good to say.  We being proponents of Global Macro as not only a strategy but as the best strategy across a full market cycle decided to take it upon ourselves to look at Global Macro against the SP500 from the beginning of the crisis October 2007 to now.

What we find is that while the SP500 is down -24.41% from the beginning of the crisis, the HFRXM Global Macro Index is basically flat at +1.04% for that same time.  In fact if you had invested $1000 in each of the HFRXM and the SP500 on October 1, 2007 your investment in the Global Macro Index would be ahead of the SP500 by 33%.  So while you wold not have huge absolute gains, you would also not have huge absolute losses.

$1,000 Invested In HFRXM and SP500


Of course such comparison offer little real value since the SP500 is a horrible benchmark for a macro trader.  Global macro encompasses stocks, bonds, commodities, and currencies so it should be relatively uncorrelated to any one asset class.  What sets global macro apart from other strategies is that it enables the trader to go wherever they see the best opportunities.  Of course just because they have the flexibility does not mean that they will catch every move, but it does allow them the flexibility needed to avoid large losses.

Happy Trading,

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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

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Active Beta and the Carry Trade

Previously we have written about our active-beta strategies and how we are applying them to equities and fixed income. We also mentioned how we were working on a solution to systematically take advantage of the carry trade. After a lot of research we have finally devised an acceptable method to capture returns while at the same time minimizing drawdowns.

In the initial stages of research we did a lot of search and came across a few good and several bad ideas. One of the most insightful things we read came from Macro Man . He wrote where he uses a volatility filter to tell him when it is a good time to be involved in the G-10 carry trade. After further research we found it to be true that the best time for the carry trade is when things are fairly stable and volatility is low or declining and the worst time is when it is high or rising. This of course makes sense since the majority of this strategy revolves around trying to

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capture interest rate differentials from high yielding currencies versus the low yielding currencies. When excessive volatility comes into the market many participants will start to unwind their leveraged positions and in so doing they can wipe out a lot of gains from the carry. Using a volatility filter helps to sort out the high, moderate, and low risk times. For the most part we want to be involved in the moderate and low risk times and step aside in the high risk times.

Of course volatility is not the only risk to the carry trade. Anytime a central bank decides to change rates the carry will change and depending on what they do you can make or lose money. Also if a few large market participants quickly unwind positions you can get hit before the filter is triggered. What we have attempted to do is to simply eliminate a regularly occurring risk and improve our risk-adjusted returns by avoiding that risk.

Some investors new to currency trading might be wondering what is the carry trade? It is when you go long a high yielding currency and go short a low yielding currency. The G-10 carry trade is simply to go long the three highest yielders and go short the three lowest yielding

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currencies. Right now for instance you would be long the New Zealand Loonie, Australian Dollar, and the Norwegian Krone. You would go long these against the Japanese Yen, US Dollar, and Canadian Dollar. In a currency account you can put these on and then decide how much leverage you want to use. If you are new to currency trading and/or are constrained in your trading instruments you can just buy the DBV-Deutsche Bank G10 Currency Harvest ETF. It does exactly this strategy and applies 2X leverage. Since trades ETF’s we use the DBV to take advantage of the carry trade.

Happy Trading,

The Macro Trader

P.S. 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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Macro Trading Versus The SP500

Macro Trading has many benefits versus equities. As mentioned before a global macro trader can trade in any asset class, in any country, using any strategy. So what are the benefits of these freedoms? Well there are many but here we will focus on two of them. First is that using multiple asset classes, countries, and strategies we are able to get a more consistent stream of returns. When one asset class zigs one is zagging. If we blend them together well we can end up with a very steady stream of returns.

This chart shows $1000 invested in the Barclays Group Global Macro Index versus $1000 invested in the SP500 from the beginning of 1997 to the end of September 2007.

The other major benefit we will discuss here is that our risk profile is much better. The worst drawdown in the SP500 since 1997 was -46.28%. Now compare that to the Barclays Group Global Macro Index where your worst drawdown was only -5.22%.

Charts showing drawdowns for Macro Index and SP500 1997-September 2007

You can see that there is more than just a slight difference. Where the SP500 is more or less at breakeven for the past seven years the Macro Index has never taken longer than eight months to make a new high.

If you are only trading or investing in one asset class or if you are only trading in the United States please look at some of the benefits of adding some asset classes, countries, and trading strategies to your portfolio. Long term we think you will be happy you did.

Happy Trading,

The Macro Trader

What is Macro Trading?

At we view macro trading as a process of finding the best risk to reward situations on the planet. Instead of being put into a style box we are free to go to where the money is. Many money managers whether they run a mutual fund, hedge fund, are a proprietary trader, or even a retail investor box themselves into a corner by only looking at one or to asset classes and even than only looking at a segment of that.

For instance look at the Mutual Fund industry. Most funds have such a strict mandate that they can’t invest out of the United States and many even have limitations on the capitalization of the stocks they can buy. And then on top of all that most are not allowed to short or use derivatives. While doing all of this may help Morningstar put you in a style box we here at think that it limits yourself to potential opportunities and forces you to allocate your money to less than optimal risk to reward opportunities.

So in conclusion to us macro trading is being able to go anywhere in the world, trade any instrument, using any strategy. The objective of a global macro trader is to find the absolute best risk to reward situations on the globe.

Happy Trading,

The Macro Trader