A Complete Guide to Macro Strategy

4 years ago

A global macro strategy is a hedge fund or mutual fund strategy that bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles. Holdings may include long and short positions in various equity, fixed income, currency, commodities, and futures markets.

What is Macro Strategy?

A strategist develops an investment policy and determines the approach, or “style,” by which a fund will achieve and maintain its objectives. Such an approach includes asset allocation, manager selection, industry and sector rotation, and security selection. A macro strategist will use a top-down approach based more on market and economic conditions. This will allow a fund to position itself in its holdings in each asset class or sector based on the overall macroeconomic conditions. As a result, it will be a more volatile strategy as compared to a value or growth approach. In fact, a typical macro strategy may have more than 100 to 300 securities while a value or growth fund might only have 20 to 30 stocks.

What are some of the macro factors that a macro strategist would consider when looking at various investments?

One of the most important factors to look at when beginning a macro strategy is the overall economic climate.

Rising or falling interest rates- If interest rates fall, bonds and bond funds are likely to perform well because companies with a high amount of debt must pay higher amounts for this debt which translates into higher corporate earnings. This increased interest expense associated with higher rates also decreases the value of some existing bonds.

Economic expansion or contraction- Typically, a macro strategy will try to stay in line with the general economic cycle of the economy. For instance, if an economic recession is occurring, the markets usually go down and one’s investment might do well. As the economy begins a gradual rise from the recession, the markets will begin to rise as well. When a complete economic expansion is in place, companies that only focus on emerging or strong markets do well.

Monetary policy- The Federal Reserve is the primary banking system in the U.S. The Federal Reserve President has a great deal of control over the U.S. economy and the growth or contraction thereof. Mostly, this will be done by influencing the Federal Funds Rate. This rate is a benchmark for all other interest rates. The Federal Reserve is often unpredictable and that makes it hard to follow its monetary policy. However, the Federal Reserve will sometimes give signals to the market as to what steps they may be taking in the future.

Imports and Exports- Imports and exports will have a great deal of influence on the overall economic development of countries. Exports will contribute to a healthy balance of trade. If the imports outweigh the exports then there may be a problem with the economy. This is also a common situation that occurs during a recession.

China and India- China and India are two of the fastest growing economies. Many companies are trying to produce cheap goods that can be sold to these countries on a cost-effective basis. One way to invest in this growth is through the purchase of companies that have a presence in China and India today. A company like Wal-Mart (WMT) may be a wise investment.

Stock Markets- Stock markets are affected by various factors. A country with a strong and growing economy tends to have a higher stock market. A stock market will also be affected by economic conditions in other countries it is trading with. A stock priced company may also be affected by the market of a country that it is supplying its goods to. Interest rates can also have a strong affect on a market and the investing climate.

What are the various macro strategies?

Macro strategies can be generally categorized into four different investment styles/approaches: large cap value, small/mid cap growth, emerging market, and global macro.

Large Cap Value- Large cap value funds aim to pick stocks from the largest companies in the U.S. that are at a deep discount. Large cap value funds will buy companies that have a low price-to-book ratio, low price-to-earnings, and some degree of undervaluation. There are often no institutional or prominent investors in these types of funds.

Small/Mid Cap Growth- Small or micro cap growth funds are investment funds that tend to look for smaller companies with less stable balance sheets. However, it does not mean that these companies are always in the early stages of their growth cycle. For instance, many of the companies that are part of the NASDAQ 100 may qualify for a small/mid cap growth fund.

Emerging Market- Emerging market funds managers will purchase stocks from companies located in under-developed or emerging markets. These countries could be partially industrialized or still underdeveloped. These funds may be more volatile than a developed market and will incur higher levels of risk and reward.

Global Macro- Investments in global macro strategies tend to be in more leverage positions. This type of portfolio may be comprised of 20 to 30 percent or more investments in foreign companies. These types of funds may hold a variety of securities and market positions. Much of this portfolio will be leveraged in emerging markets and high-yield emerging market bonds.

Should I invest in macro strategies?

Macro strategies will have higher investment costs as compared to other mutual funds and hedge funds. Macro strategies will also have higher turnover rates and higher-risk profiles.

Is it worth the effort for a novice to invest in a macro strategy?

A macro strategy can provide a less hassle way for an investor to enter into the global market. Some of these funds could be based off of gold indexes. This will provide a way for an investor to get exposure to the gold markets at a much cheaper cost than purchasing actual gold. Macro strategies can provide an investor with a global perspective while minimizing the risk.

What is the most important factor in managing a macro strategy?

A macro strategy will require a great deal of management. An investor will need to have a strong knowledge of global and American economic issues, a knowledge of the fixed-income markets, and an ability to develop a robust and properly diversified portfolio. It is also important that a macro strategy professional are able to have a skillful understanding the changing global macroeconomic trends.

How do you find a macro strategy?

Macro investment managers can be hired as freelancers or as employees. Many employees with develop and support strategies for institutional investors. It is important to assess a macro investment manager’s ability to identify long-term trends. The ability to identify a downward trend in a declining market can save an investor billions of dollars.

How should one monitor a macro strategy?

A macro strategy will usually have larger investment risks than other mutual funds. Therefore, a closer level of scrutiny should be implemented if this style of investing is considered. A frequent review of the portfolio is recommended but the level of monitoring will be dependent on a variety of factors. The amount of assets invested in the fund, the market, and the investment manager will all determine the level of monitoring that should be instituted.

What other ways are there to invest in macro strategies?

Investors can invest in the Macro sector by purchasing investment trust funds. Some of the more popular mutual funds in this area are the Market Vectors (ticker symbol MFM), the Canyon (ticker symbol CNY), the Oak Ridge New Asia (ticker symbol ORI), and the First Trust Macro-Strategy Fund (ticker symbol FXP).

What risks are involved in investing in macro strategies?

Macro strategies have a few drawbacks. These funds may be harder to review and even difficult to find. However, macro strategies has the potential to generate higher returns. There are also drawbacks and risks that come with investing in these types of funds. Another risk with macro portfolios is the ability to identify a downturn in the global market.

Should investors be concerned about a strong dollar?

If the dollar continues to fall, then companies located in Europe, Japan and China may suffer because of high amounts of struggling to compete with American companies. However, companies that are becoming more dominant in the global market, due to their extremely high levels of growth may benefit from a strong U.S. dollar. Earnings for such companies may also increase due to the falling dollar.

Should investors be concerned about a weak dollar?

If the dollar is weakening then American companies that are earning profits abroad will have a difficult time paying off the dividends to shareholders. A weaker dollar could also lead to an upward trend in inflation. Companies that are not exporting to foreign countries may suffer with a weak dollar.

How do investors hedge against the risks of macro strategies?

There are various ways of hedging against Macro risks. One way for an investor to hedge is to purchase put and call options. This strategy is the least expensive way to hedge risk. These types of options will help offset risk while limiting the upside potential. Another way for an investor to hedge is to purchase replacement stocks so that their portfolio will not be affected during a downturn in the market. One popular replacement stock is Google (GOOG) because of their strong market presence and the gobal reach of their businesses. Another option is to hold a piece of gold with a low cost of storage.

Are the risks associated with macro strategies worth the rewards?

There is a chance that investments in macro strategies have the potential to generate high returns. An investor should be willing to accept the risk of this style of investing.

How should one invest in macro strategies?

An investor can purchase individual stocks that are located in foreign markets, hedge against future risks, or invest in a fund that has already done the work for you. Investing as an individual requires actually owning a stock in an overseas market.

What new trends should an investor consider when purchasing a macro strategy?

The Internet, biotechnology, and green technology will continue to flourish during the 21st century. It will be imperative for investors to understand these trends so that they can capitalize on the potential for the future.

Is it worth the effort for a novice to invest in Macro strategies?

Macro strategies can be a great addition to a portfolio if an investor is willing to invest time and energy into them. Investors may want to seek help from an investment professional.

What is the most important factor in managing a Macro strategy?

Macro fund managers will need a great deal of knowledge and a great deal of experience. Knowledge of global economic shifts, both U.S. and foreign, will be vital in keeping a macro portfolio ahead of the pack.

What risks are involved in investing in Macro strategies

Macro strategies have a few drawbacks. These funds may be harder to review and even difficult to find. However, macro strategies has the potential to generate higher returns. There are also drawbacks and risks that come with investing in these types of funds. Another risk with macro portfolios is the ability to identify a downturn in the global market.

Should investors be concerned about a strong U.S. dollar?

If the dollar continues to fall, then companies located in Europe, Japan and China may suffer because of high amounts of struggling to compete with American companies. However, companies that are becoming more dominant in the global market, due to their extremely high levels of growth may benefit from a strong U.S. dollar. Earnings for such companies may also increase due to the falling dollar.

Leave a Reply

Your email address will not be published.