The persistent volatility that global markets experienced in 2011 seems likely to continue in 2012. The ongoing European debt crisis, the prolonged political instability in the Middle East, and the upcoming political elections in the U.S. all foreshadow another turbulent year. Although many alternative investment managers find difficulty generating positive returns in such markets, they are the ideal conditions for global macro managers.
On the whole, global macro managers surprisingly ended slightly negative in 2011. As markets shifted unexpectedly in ways that were not dictated by economic principles or past events, but by the involvement and actions of regulators and governments, global managers suffered.
In 2012, many investors expect that global macro managers will be better prepared to take advantage of the economic environment. US Government pensions, such as the California State Teachers’ Retirement System (CalSTRS), are evaluating global macro managers to meet their aggressive profit targets, while other investors are seeking these funds as a way to diversify their equity portfolio.
Global macro funds attempt to produce large risk-adjusted returns by using leverage to invest across a number of asset classes, including commodities, equities, fixed income, options, and currencies. As the name suggests, these managers take a global investment approach, investing across all regions, and they follow an investment philosophy that is based on macroeconomic principles. They attempt to take advantage of pricing discrepancies in the market, so the timing of trades in and out of a position is critical.
Global macro managers’ approach to trading is either discretionary or systematic. More than half of all global macro funds use a discretionary approach, often employing a top-down methodology. They examine qualitative information and quantitative financial models to gain an overview of the market and, more specifically, an understanding of global trade, financial flows, and changes in the global economy. To ensure that these macro assumptions are correct, some managers check them against a bottom-up or microeconomic methodology. Their micro analysis may even go as far as seeking out political figures in key regions to gain a better understanding of local policy issues.
Systematic managers generally base their investment process on advanced econometric models and use quantitative analysis when making investment decisions. Their models usually rely on fundamental factors, such as price dynamics, value, and growth. Typically, these factors are used to analyze developed markets, as there are a good deal of inefficiencies associated with emerging markets and a general dearth of data. Investors often are more apprehensive when considering systematic funds because they tend to be less transparent. However, because these funds trade strictly based on models and are therefore unaffected by traders’ emotions, they can perform well in turbulent markets. In general, systematic strategies outperformed discretionary strategies in 2011.
Some global macro funds focus on specific markets, such as Latin America or Asia. Others concentrate on specific asset classes, such as currencies or commodities. This is one reason why it’s often said that global macro managers have the broadest mandate. They can take a position in any market or region or asset class, and in any instrument. Over the past few years, as institutional investors have shown increasing interest in global macro funds, many managers have used this wide latitude to diversify their fund’s
As a result, AVC Advisory anticipates that investors looking to gain exposure to a strategy that is by and large uncorrelated to volatile equity markets will increasingly consider global macro funds.
Because prices worldwide are mainly being driven by macro factors, and there’s no sign of change, AVC Advisory expects that global macro is likely to have the upper hand in 2012.