Macro vs Equities MM?
Recently been seeing many people on these forums cite that macro/commodities PMs get higher payouts then equities. using MM here because seems majority of Macro HFs have MM structure.
in a bubble, why is this? Better regime past 2-3 years? Leaner pods?
also curious, which one would you consider to better gig (also in a bubble, assuming interest is equal)? Is there some catch to working as a macro PM at a pod? (Sharper drawdowns, less opportunity in low vol years, etc.)?
Ah, the age-old debate of Macro vs. Equities within the MM (Multi-Manager) structure, a classic conundrum that's been the subject of many a discussion on Wall Street Oasis. Let's peel this banana and see what insights we can gather from the jungle of high finance.
Macro vs. Equities MM:
Payout Differences: It's been noted that macro/commodities PMs might enjoy higher payouts than their counterparts in equities. This could be attributed to several factors:
Regime Performance: The past few years have indeed seen significant geopolitical and economic shifts (think global pandemics, inflation concerns, geopolitical tensions). These environments can be fertile ground for macro strategies, which might explain better performance and, by extension, higher payouts.
Choosing the Better Gig: This is akin to asking whether you'd prefer to swing through the trees or run on the ground. Both have their perks and pitfalls.
In the end, the "better gig" depends on your appetite for risk, your analytical strengths, and where you find your interests lie. Both paths offer opportunities for significant rewards but come with their own set of challenges and risks.
Remember, whether you're navigating the choppy waters of macro strategies or dissecting the nuances of equity markets, the key is to stay informed, adaptable, and always ready to learn from the market's endless lessons.
Sources: Performance of the best PM’s at MM’s?, What I've Learned About Hedge Fund Structure and Compensation, Q&A: Non-Target School to Portfolio Manager at a Top Hedge Fund – 6 Years Out of Undergrad, HF exits from macro vol desks?, https://www.wallstreetoasis.com/forum/asset-management/qa-equity-research-analyst-at-top-3-am?customgpt=1
different risk model bc it’s harder to hedge macro products, so you’re forced to take big bets, when they work out you get paid more
Payout ratio is the same, but it's easier to scale in macro products as a lone wolf than in equities.
In equities, you need analysts to cover additional names at some point, as there are functional limits to how many companies a single person can keep an eye on. By contrast, in rates for example, you only have a few different instruments and points on the curve you can use to express your views, making it easier for a single person to have an opinion on where these things should trade.
While in equities the growing pains are in the eyeballs needed to cover companies, in macro it's the fact that rates markets are OTC and very high touch and manual to get into and out of positions (i.e. trading execution). So you're far more likely to see a macro PM with several execution traders who don't provide much in the way of idea generation than you are to see a macro PM with analysts who each "own" a particular segment of the market.
You can also lever macro products far more than equities, many rates RV funds run 20-50x leverage vs equities pods at 3-5x.
Can you speak to the differences someone should compare when considering the two careers? Personality, comp progression, early career stages to get into a seat, ease of making PM, drawdown differences, etc? You might come from a bias as your in RV, but do you think one is better.
for context, I need to decide what to focus in on for SA next year. I am working at a smaller macro fund this summer but I do both l/s equity and macro in my PA. Recruiting starts so soon, and while I could try to recruit for both it is probably a good idea to specialize. I’m currently agnostic, and need to get a better picture of the upside and downsides of both.
Also—do you think RV will become more systematic in the future? My quant skills are serviceable but certainly not my edge.
First we should define terms, you can do RV in either equities or macro products, so RV isn't a good descriptor. It just means you're trading one thing vs another.
Second, macro strategies exist along a spectrum, with about 10-15% being "pure directional macro" and 10-15% being "pure RV" and 70-80% existing somewhere in the middle. Pure macro takes directional bets (paid rates, sell bonds, buy usdjpy, etc.) and pure RV take views on basis (long bonds short bond futures) and spreads (short bonds receive swaps). Generally speaking (but not always), I would consider curve trades to be closer to pure macro than pure RV. Most of the seats trading macro products will in the middle, which I'll refer to as "macro RV" and this will be the only relevant category I'll discuss.
Macro RV
Pros: ability to scale quickly, smaller talent pool (arguably because the skills are more difficult to learn and there are fewer people who really know what they're doing), generally uncorrelated to other assets, more interesting product set (subjective), true edge is more durable
Cons: top-heavy (AUM flocks to the best performers), junior pay is a bit worse, rates trading is probably in structural decline since Basel III/Dodd-Frank with the exception of COVID volatility, limited transferable skills
Equities
Pros: junior pay slightly better, more transferable skills (go to ER, IR, long only, etc. if you wash out), equity trading not in structural decline broadly
Cons: skillset is more commoditized (easy to read a 10-k, learn accounting, etc.), work is more boring (subjective), edge is arguably less durable
I had a similar choice and decided to go with macro RV because I found it more interesting but going with equity L/S is probably the easier choice overall. The more important determinant of your success over the next 5-10 years is your own interest, because you'll be up against people like me who enjoy doing this at nights and on weekends.
Just out of curiosity how do the pods structure the risk of the macro PM's? Are you just given a draw down limit and/or a DV01 max? How about for FX? How concentrated can you be? Always wondered how the platforms can control the risk profiles of the macro traders (directional) given the small amount of instrunments available to trade.
Typically both. We have a drawdown limit on a defined capital base that sets our stops, but also a max dv01 limit set per product based off historical volatility that determines max individual position sizing. Less volatile structures have higher gross dv01 limits, etc.
In addition to the above, Sharpes are generally lower in Macro pods. Overall it's harder to make money in macro as the edge is generally lower, but it's made up by the fact that Macro strategies are high capacity and uncorrelated to long/short equity. This also translates to a smaller talent pool in Macro which is why you hear of large compensation packages typically to poach Macro PMs
Do you think sharpe will compress as more AUM is deployed into RV/curve trades? I feel like now a days all I read about in macro is RV. Also, how tactical do you think RV will continue to be into the future? Seems like a lot of the work of the RV trader could be reduced to signal generation in a more systematic strategy—maybe I don’t understand RV enough.
Also, are there any guys at pods who are more pure macro traders, how take long tail risk positions? Seems like this demographic is dying in favor of RV/trading the curve. If this is the route I want to go, should I start doing RV then pivot to a macro multimanager?
I read this argument a lot about RV and I honestly don't really understand them. It's very difficult, if not impossible, to systematize rates RV strategies. There are a lot of discretionary decisions that have to be made when putting on RV trades (e.g., every single bond is slightly different, there's no perfect theoretical 10y bond).
Data quality is the first problem, sometimes I don't even know where the true market mid is within a 2-3bp range (e.g., cross-currency basis). It's impossible to come up with sensible systematic strategies with data quality that poor because the market is so opaque. Good luck getting reliable historical data going back further than 5-10 years (especially with RFR transitions, etc.) LOL.
Answered this above, but I wouldn't really consider curve trades to really be a part of the RV toolkit (though there are some exceptions). With bond basis, there's a more or less constant return on balance sheet that you can count on. I would actually expect sharpe to go up as things like mandatory central clearing are introduced.
If you want to understand rates RV, I'd start with this book: Amazon.com: Fixed Income Relative Value Analysis, + Website: A Practitioners Guide to the Theory, Tools, and Trades: 9781118477199: Huggins, Doug, Schaller, Christian: Books
Just out of curiosity how do the pods structure the risk of the macro PM's? Are you just given a draw down limit and/or a DV01 max? How about for FX? How concentrated can you be? Always wondered how the platforms can control the risk profiles of the macro traders (directional) given the small amount of instrunments available to trade.
It's honestly pretty straightforward - you have drawdown limits and volatility and VaR targets and management tracks them. If you are ever particularly large in something that management is uncomfortable with and they call and say some combination of 1) explain what you're thinking, 2) suggesting maybe be smaller, 3) don't be bigger. I am not sure if I would say there a small number of instruments across Fixed Income / FX / Equites in G10 + some subset of EM world in addition to Commodities. Throw in volatility + RV type expressions of views and available instruments is even larger.
but why equity pms seems earn more than macro？also wondering which one is easier to start ur own hf？
Also appears that equities PMs stay longer from what I’ve seen. Macro stars hop around shops but other than that lots of turnover because equities baked in beta.
Just do you want enjoy Inter, truly this job is hard enough if you do not enjoy you will not last. 2nd half of last year I would say Equities caught up to Macro easily, and in 2024 so far it looks like an easier setup for Equities again. That said for many reasons Macro strategies are still expanding this year and will continue to do so even if this is not the banger year.
Take a economics class, take an accounting class. Read investor pitches online, take a python programming seminar online. Read the economist, Read HBR.
This is the right answer.
Easy to be fooled in your early 20s about your ability to draw a long-term career plan. It almost never works out as planned.
Best you can do is find something you enjoy/are good at (they usually go together) and see where that path takes you.
Do you have any advice for figuring this out specifically in an asset class. Tbh I’ve had experienced in l/s equity at school and internship in macro and enjoyed both. Feeling pretty agnostic and it’s making recruiting more confusing.
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