Developing Macro Understanding

Fellow Monkeys,

Like several recent posts, I’m in IB but highly interested in switching into Macro HF in the future. Given my education in international relations & foreign language and my foreign policy-focused profession prior to banking, I’ve always been interested in geopolitics and the macro framework. 

After digging around on the forum, I found a thread I’ve started to work from to develop my understanding (1st Year Macro HF Analyst: My Macro Framework). The articles and Twitter accounts referenced have been helpful, but I do have some questions for those more experienced and knowledgeable.

  1. Is there a specific path you found to be best in your journey to learn more, such as should I focus on x topic first, then y, etc? Or should I just soak up as much as possible?

  2. Any books, blogs, Twitter accounts, or other sources you would recommend?

  3. I’ve noticed some funds starting to hire individuals specifically for geopolitical analysis. Any insights into how this group fits in to the overall process? I’ve read geopolitical understanding is great but you ultimately still need the financial understanding.

I would appreciate any help or advice!

Thanks.



 

Based on what I know, there really isn’t any structured path to global macro. Pre-2008 the most direct path was from prop trading to global macro. Post-08, people in global macro come from all over finance, ranging from S&T desks within FICC to macro research/investment strategy teams and even former IMF or fed reserve guys. Spots within global macro have also always been limited, which leads to its rarity in hiring. Breaking into global macro mostly depends on luck/coincidence (aka being in the right place at the right time).

 

being in s&t is generally how u move to macro. FICC and ect

 

i work for an oil company so i can't be 100%, but experience with govt and etc debt def makes you a suitable candidate. if your in a FICC related role there's definitely some sort of macro baked into it although some more than others but if youre in a bank than you have the ability to network with the other desks and learn from them and possibly move there if there's an opening.

 

Was a dead strategy for so many years.... all of a sudden, global macro hedge funds hit 150%+ gains in 2022 and everyone wants to do global macro now lol. A lot of global macro fund managers got rich overnight (50 mill to 500 mill+ paydays in 2022). 

I doubt the fund managers themselves expected to hit a year like this. Barring another COVID like event, I don't think we'll see another outsized return year like this in global macro for another 20-30 years. 

The skillset to be successful is quite different compared to PE/IB as PE/IB is more about relationship building at the partner level. 

Global macro fund managers are stereotyped to be socially awkward guys. But they usually have a very strong quantitative background (PHD Economics/Stats/Comp Sci/Physics from HYPSM, etc.). Barrier to entry is quite high. Attracts more of the nerdy, 140+ IQ research types. 

 

I didn't even know these funds hit out of the park last year/didn't previously. I just became interested because all the volatility around the world and domestically (especially this year) caught my attention and seems x100 more interesting than IB/PE. I've come to realize I couldn't care less about individual companies or their strategies or whatever. Want to do something more involved in the live markets and the day to world. Too bad it seems these spots are so limited or reserved for quant-types quite disappinting...

 

You have to realize also that there were 5-10 people max who made that sort of money that I quoted (50-500 million+) in 2022. There's not many global macro funds to begin with and usually they underperform compared to other hedge fund strategies. 

Those funds were stagnant for years (might be possible that many those fund managers were worth sub 9 figures before 2022...), so really 2022 was the exception to the norm. 

Have to be extremely passionate about the industry. All I'm trying to say is that there are more spots open relatively speaking in PE/IBD vs. global macro. The intellectual bar is higher for the industry also. It's a tougher business to be extremely succesful in. 

 

When referring to quant skills, do you mean more programming or analysis? If programming, what languages should one focus on building an understanding of (Python, Java, etc.)? If analysis, how would you recommend someone build such skills who comes from a traditional finance undergraduate program instead of math, engineering, etc.?

 
Most Helpful

1) Build a very solid foundation in macroeconomics. I recommend reading "Macroeconomics for Professionals" as a starting point. Then check out one of the two solid books on economic indicators to get a grasp on what data the market pays attention to and the nitty-gritty nuances about them. Finally, skim through “Central Banking 101” and other books about central banking, monetary policy, and such. Make sure you do not get sucked down the political and philosophical rabbithole. You're in this for money and not ideology.
2) You need to have a very strong understanding of STIRS. Pick up a textbook on bond math and get very familiar with concepts like convexity, duration, and the like. Supplement that with Hull (Options and futures) to balance out your product competency. Fabozzi is a good resource too.
3) Understand macro strategies. The pillars of macro are: carry, relative value, basis, trend following/momentum,  policy, and "bread & butter" trades. You can express them on rates and FX or their derivatives. Each pillar has an "idea generation" work flow. Don't use chained-logic, make robust arguments instead.
4) Understand that "technicals" in macro mean positioning (in futures) and sentiment (street survey's). More and more this also means option positioning as well. Gammasplode is a term.

Carry: Country A is paying more than country B. Interest rate differentials at play. Buy A sell B.
Relative value: Country A is paying the same as Country B but is far less risky. Buy A sell B. 
Basis: Future - Price. 
Momentum: Country A currency is outperforming its peers on a 3m/6m basis. Buy it if you believe trend will persist. 
Policy: Country A central bank is raising rates. Country B central bank is easing. Buy B sell A. 
B&B: Economic activity is picking up in country A, so yield curve should steepen. Buy steepener.

These are very basic examples of trading ideas, but are a good place to start. When I hire a jr person on the team, the first thing they pick up is cross-asset strategy, which is how the major asset classes trade vs. each other. Significant moves in the rates market will correspond to moves in fx and equities as well. This is very key and will help you understand market thinking. Beyond this, practice makes perfect, so just reach out to macro people you know and strike up conversations with them.

Cheers.

 

I think macro has proved to be a solid diversified stream of alpha since the inception of interest rates. Managers who fixate on one asset class and region tend to do poorly. Managers who get philosophical tend to do poorly. 
 

Macro is now “en vogue” because the two big groups that don’t generate consistent returns (g3 fx and philosophical Fed watchers) actually did okay. I see this as persisting for some time, because rates across the globe have moved higher. However, the degree of moves will be more muted (unless something breaks), which caps the level of returns on simple directional trading. Good macro managers are trading across the spectrum of ideas and not simply short bonds where nominal rate < inflation. 

 

Just wanted to thank everyone for their incredibly helpful replies. For those of us looking to break in, we most certainly have a much better idea of what to focus on. 

 

Does anyone have any must-read research analysts or publications you regularly follow on the sell-side? So far I only read anything published by Zoltan at CS but would appreciate all recommendations (FX/Commodities/Cross-Assets..)  

 

Read. And then read some more. 

Start with the greats... Schwager's Market Wizards and Drobny come to mind. Try to tease out why the folks interviewed are trying to put on the trades that they do (Drobny's stuff is a little better for this)

Intermediate level reading... Alchemy of Finance (you'll read this 10 times and wonder each time what you just read, but it's Soros, so you have no choice). Pick up Dalio's set on Economics... I'm not a huge fan of his but this is an excellent way of starting to think about the world.

Pick up a WSJ or FT sub.. read Markets and World sections. 

Go read some of Matt Klein's old stuff, dive into twitter and substacks, FT Alphaville... the stuff written now is free and is of an unbelievable quality.

Over the last decade I've probably read and then reread all of these books multiple times, each time I gain an appreciation for a way of reasoning I hadn't thought of before.

Macro isn't a subject you can master, but it is fascinating. Listen to podcasts - there's plenty out there - and develop your own framework for thinking. 

If you do all of this and you really love it, then its worth making the plunge. Barring connections, working in macro trading at a bank is probably your best bet. 

Good luck!

 

Also here are some other primers that I've found to be useful for getting up the learning curve in the arcane world of galaxy brain macro.

Rates:

Interest Rates Bible: https://www.macrodesiac.com/the-only-guide-to-interest-rates-you-need/

The Ultimate Guide to Bonds Trading: https://www.macrodesiac.com/the-ultimate-guide-to-bond-trading/

FX:

The Deutsche Bank Guide to Exchange-Rate Determination: https://t.co/yBG3aVqiS8

JPM FX Guide: https://www.dropbox.com/s/vx7ukzvk0r666ud/JPM%20FX%20guide.pdf?dl=0

Something else I would note is that it is one thing to understand the the tradecraft and jargon used in FX and rates but another to understand the drivers of these markets.  This is a whole post in itself but I can point to towards some resources that I found to be useful. To start I would read, then reread the  Piper Sandler's "Interns Guide To Macro." You can find that here. That gives you a great overview of the business and liquidity cycle and how they impact asset classes. I would also recommend that you check out Variant Perceptions blog and YouTube channel which lets you inside the mind (albeit backwards looking) of a top down investor and how they think about the business and liquidity cycle.

I too am a dumb equity guy trying to get up the learning curve so it would be great if the real macro monkeys could throw some of their best resources into the ring.

From my post on: https://www.wallstreetoasis.com/forum/hedge-fund/macro-rates-and-fx#com…

Remember, the grass is always greener on the otherside because it's fertilized with bullshit.
 

My recommendation is to understand key economic releases and variables. So for example when the Fed has an FOMC or if you are US then unemployment claims etc. After see what it means for certain asset classes so it could be MBS, EM, HY credit etc. If you don’t know the product you can search for primers… PIMCO has pretty good ones.

I also recommend reading global macro or strategist prices as they often highlight their analysis based on xyz economic event and you start to understand it more.
 

In terms of breaking in… I know many people from Harvard Kennedy, LSE and other big policy/econ schools. For purely quant then yeah totally a PhD. PIMCO had a great team and some policy people, MBAs, PhD.

 

Oh yeah, one more goated paper which you can find online is "Lessons from cycles, crises, clients and colleagues" by John Normand. This along with Piper Sandlers Interns guide to macro are the goated intro papers for learning about the liquidity & business cycle. Which drive returns for all asset classes and sectors.

Remember, the grass is always greener on the otherside because it's fertilized with bullshit.
 

Great posts! I highly recommend that interested analysts start to play around with Bloomberg / Eikon / Factset using data to measure and observe relationships to market prices to reenforce learning. I remember when I first stumbled across a terminal at my college library -- I couldn't sleep for days and would sneak in to use and learn it. 

Also:

John Normand, Mark Cabana, Zach Pandl, and Mike Nocerino are fantastic. 

 

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