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Active investment strategies: Global macro

  • Wiley Global Finance WILEY GLOBAL FINANCE
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People absorb information about macro-economic themes every day without realizing they are doing so. Newspapers and web sites—financial and non-financial alike—are filled with stories about the over-arching macro trends unfolding all over the world. If asked generally, most people would probably say that they know little about macro, but if questioned about the state of the housing market or the influence of China, most would likely come off as fairly well informed. The same goes for investors—the majority claim that they are stock pickers who focus solely on bottom-up company analysis. In reality, they often are choosing these stocks based on bigger-picture trends guiding the entire industry. The influence of macro extends far beyond what most people realize.

Ignoring macro is like ignoring the seasons when trying to predict the weather. Any December day in New York City is likely to be a cold one. The “macro” backdrop dictates wearing a coat instead of shorts. The “stock specific” issues determine whether that coat should be a winter parka or a lighter jacket. It’s possible to decide incorrectly on the choice of coat, but regardless one is usually better off wearing a coat than shorts in December in New York City. Macro trends influence everything that happens in the markets, but the extent of its sway is probably a surprise to even those who embrace these trends. Investors who actively harness the powerful influence of macro and use it to their advantage can set themselves apart from the pack. Investors often have a difficult time explaining the performance of their stock picks. This is largely because they underestimate the influence that macroeconomic forces have on individual stocks. They search for a connection between returns and earnings or management strength, but the truth is that an overwhelming majority of stock performance is explained by forces that go beyond the income and cash flow statements. In fact, the data show that historically 71 percent of equity returns are explained by macro trends.

Global Macro is about making often highly leveraged bets across various investment classes from international stock and bond markets to currencies and commodities. Many decisions traders make using this strategy are fundamental and subjective. They study macroeconomic issues and events from various countries that may provide enough information for them to form judgments, reach investment conclusions, and place bets. They may also try to determine how an event in one corner of the world could affect markets elsewhere.

Successful examples include how former hedge fund manager Stanley Druckenmiller predicted correctly and quite lucratively how the fall of the Wall in Germany would boost the value of the deutsche mark. Felix Zulauf correctly anticipated the decline of the U.S. stock market in 1987 by noting that a fall in the U.S. dollar would hasten a decline, as tight money then combined with high stock valuations were incompatible. George Soros notoriously bet nearly $10 billion of borrowed funds that the British pound would be devalued and he was correct.

Enter ETFs

In the United States, ETF issues geared to overseas and alternative investing have grown faster than any other sector. Many of these ETFs, particularly in the single-country fund area have existed for quite some time but languished with little trading volume during the 1990s as investors focused on the U.S. stock market boom. Furthermore, many overseas ETFs are becoming more specialized in subsectors with diverse issues focused on value, small-cap, and dividend models. ETFs are a primary tool to build and implement global macro strategies for the trader and retail investor.

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Article copyright 2011 by David H. Fry, Francois Trahan and Katherine Krantz. Reprinted and adapted from Create Your Own ETF Hedge Fund: A Do-It-Yourself ETF Strategy for Private Wealth Management and The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground with permission from John Wiley & Sons, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments® cannot guarantee the accuracy or completeness of any statements or data. This reprint and the materials delivered with it should not be construed as an offer to sell or a solicitation of an offer to buy shares of any funds mentioned in this reprint.
The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Fidelity is not adopting, making a recommendation for or endorsing any trading or investment strategy or particular security. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. Consider that the provider may modify the methods it uses to evaluate investment opportunities from time to time, that model results may not impute or show the compounded adverse effect of transaction costs or management fees or reflect actual investment results, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.
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