Macro Investing Strategy in Hedge Funds
Macro investing strategies available to alternative investment managers. Hedge funds and alternative investments were created to provide investment strategies for high net worth individuals and investment groups to maximize gains while protecting against unexpected market swings and losses. Fund managers of hedge funds utilize a full spectrum of investment tools that are not usually available to conventional mutual funds and individual investors. Strategies involving long/short positions, currency trading, commodities, and some hybrid investments are typical in a hedge fund portfolio.
The essential hedge fund strategy is to create a position that maximizes gains while reducing downside risks. Hedge fund investments are usually committed for years to allow the scenarios to play out entirely.
Global Macro Investing
Standard hedge funds concentrate on national or regional groups of investments in stocks, mutual funds, funds of funds, options, currencies, index funds, commodities, bonds, or a combination. Another set of hedge fund managers employs a macro view of the investment world by exercising positions in these instruments internationally. The goal is to maximize the return based upon anticipated global market movements.
And “global” is the operative word for the strategies of global macro investing strategies. Global macro investors create a set of investment strategies that are based upon their anticipation of specific economic and political events of various nations. If a macro fund manager should foresee significant growth in Japan while expecting a recession in the European Union, the manager may take long positions in Japanese companies and assets while simultaneously short selling investments with European concerns or currency.
Global Focus
For example, a manager anticipates a boom in a national or regional economy may invest in instruments that closely mirror the projected growth trend. On the other side, the manager may elect to short the particular currency of the market that is expected to fall.
In this case, if both expectations pan out, the hedge fund benefits from the long positions on the rising market and the short position of the falling currency. Therefore, the fund gains in both cases.
If one of the markets fails to perform as expected, then the benefits from one investment can counter the loss from another. And if one investment performs as expected yet the other stays neutral, there is a net gain.
Most macro strategies involve several assumptions at once that involve a combination of several different scenarios working in tandem at one time.
If the macro hedge fund managers are astute in their analysis and strategic in investment choices, the odds of increasing client wealth swings significantly in their favor.
Example of a Macro Investing Strategy
A simplified example of a macro hedge trade pertains to the 2016 British referendum to exit the Europen Union.
Assume a macro fund manager was confident before the voting that the UK public would choose to exit the EU. The manager might have taken a long position, say £10 million, in a hard asset like gold and a similar short position against the British Pound. If correct, the fund would likely gain in both positions.
As it happened, gold prices rose from around $1,100 to $1,250 per ounce between January 2016 and May 2016, a 13.5% increase. Similarly, the British pound fell from $1.45 to about $1.25 in the same period resulting in a drop of approximately the same size.
In this case, both £10 million investments would have gained £1.35 million or a total of 2.7 million pounds sterling.
Had the referendum gone the other way and the UK stayed within the EC, the value of gold and the UK pound likely would have remained about the same, since the relationship between gold and the British pound would not have changed significantly.
How Popular is Macro Investing?
The example above is highly simplified. Macro managers rarely employ one-on-one investments as in this example. The positions are often intricate combinations of positions generated by complex models and databases, frequently as hedges against hedges. As noted in the Financial Times, macro investing is not for the timid investor. The matrix of investments can be extremely complicated and understood only by the most sophisticated investors and global observers.
Macro investing demands high levels of capital to participate in the global markets effectively.
Commissions
As a rule, the macro fund managers tend to make substantial commissions based on a percentage of the fund’s gains, if any. The fee levels vary from fund to fund, however.
Traditionally, hedge fund managers may make 20% of net gains plus expenses. If the fund investment gains a net 12% after expenses in a single year, the investor retains a gain of 80% or 9.6% of the profit. The manager would earn 2.4% of the gain.
However, these high fees are under pressure as many of the larger hedge funds are offering lower fees for larger investments.
Current Global Macro Hedge Funds
Not all macro funds have been successful, and some well-known hedge fund specialists have withdrawn due to mixed results. Current leading global companies currently using these strategies include the Soros Quantum Fund, Bridgewater Associates, Moore Capital, and Crescat Global Macro.
Risks and Rewards of Macro Investing
Global politics and economic turbulence can be very unpredictable indeed. Unforeseen events may result in erratic behavior in global markets that can cause even the most carefully crafted strategies to lose. But, the best global macro fund managers attempt to devise strategies that will soften the blow of dire circumstances by protecting against many contingencies during times when conventional investments are suffering substantially.
If you have any question about our Canadian based hedge fund, we invite you to contact us today. It will be our pleasure to answer your questions about alternative investments.
