Is systematic macro just farming risk premia?

Systematic macro strategies often revolve around capturing risk premia, but it's not as simple as just "farming" them. Here's the breakdown:

1. Core Focus on Risk Premia:
   Systematic macro strategies frequently target well-documented factors like momentum, carry, and value. These strategies are grounded in academic research and are designed to exploit persistent patterns in asset prices. For example, time series momentum (TSMOM) strategies, as highlighted in the Moskowitz, Ooi, and Pedersen (MOP) paper, are a cornerstone of many systematic macro approaches. These strategies profit from trends in asset prices, often across diverse asset classes like equities, bonds, currencies, and commodities.

2. Challenges in Execution:
   While the concepts behind these strategies may seem commodified, executing them effectively is far from trivial. Key challenges include:

   • Data and Signal Quality: Identifying robust signals while avoiding overfitting or data mining is critical. Strategies like TSMOM minimize data mining risks by diversifying across assets and ensuring stable risk exposures.
   • Transaction Costs and Fees: As noted in the Hurst, Ooi, and Pedersen (HOP) paper, fees and transaction costs can erode alpha. Systematic macro teams invest heavily in optimizing execution to mitigate these impacts.
   • Risk Management: Position sizing and volatility targeting are crucial. For instance, systematic macro strategies often scale positions to maintain consistent risk exposure across assets, as seen in MOP's constant volatility approach.

3. Why Not Just Buy Factor ETFs?
   While factor ETFs provide exposure to some risk premia, they often lack the sophistication and customization of systematic macro strategies. Systematic macro teams:

   • Diversify Across Horizons and Asset Classes: They implement strategies across multiple timeframes and asset classes, which ETFs may not replicate.
   • Adapt Dynamically: They adjust exposures based on market conditions, something static ETFs cannot do.
   • Seek Alpha Beyond Factors: While risk premia are a foundation, systematic macro teams may also exploit inefficiencies or anomalies that aren't captured by standard factors.

4. Additive Value to Hedge Funds:
   Systematic macro teams bring value to hedge fund structures by:

   • Providing Diversification: Their strategies often have low correlation to traditional asset classes and other hedge fund strategies.
   • Performing in Extreme Markets: TSMOM, for example, tends to perform well during market extremes, offering a hedge against tail risks.
   • Leveraging Scale and Expertise: Large hedge funds can invest in infrastructure, data, and talent to execute these strategies at a level that individual allocators or ETFs cannot match.

In summary, while systematic macro strategies may appear commodified on the surface, their success hinges on execution, risk management, and the ability to adapt dynamically. These factors make them more than just "factor farming" and justify their role within hedge fund structures.

Sources: https://www.wallstreetoasis.com/forum/hedge-fund/demystify-systematic-macro?customgpt=1, A Contrarian View - Raging Bull, Reflections from year 4 as an equity analyst