Macro: Rates and FX
Hi,
I work in fundamental equities. I like what I do but have always had held a strong interest for global macro. I'd love to learn more about Rates and FX side of the macro strategies. Wondering if anyone could answer some of the following questions to get me started
-
Banks often lump Rates and FX together. Is this because both asset classes are driven by interest rates, therefore you can cover both with the related/if not the same type of fundamental analysis?
-
Lots of people in this field seem to have a really quantitative background. Why is this? Are you trying to get edge from your competition by performing complex stochastic/statistical/correlational analysis? Or do you need the quant skills to sift through extensive amount of economic/fundamental data (ie inflation expectations, implied pricing assumptions from swaps/derivs, yield expectations from market etc.)
-
Does it make sense that if you are good, let's say the top 10% to 20% over a period of 5 to 10 years+, FX and Rates funds are more scalable and the return generated are higher than that of fundamental equities, because even though equities have a higher inherent yield, FX and Rates are deeper markets (tolerant of scaling) and - net of leverage - volatilities (opportunity of profit) are actually higher in FX and Rates than in equities with 3-5x leverage.
-
I've heard of stories of star trader bringing home 7 to 9 digits, almost always they are rates traders (or sometimes commods guys). What is it about the structure of their trading/payout that allow them such astronamical comps, while those in other assets classes can't get even close?
-
Just for shits and giggles, how would one transition to FX/Rates from 8 years in fundamental equities?
Much appreciated,
Removed for anonymity. Removed for anonymity.
Agree on last point. Can’t think of anyone who went from fundamental equities analyst to fx/rates strat (a handful of ibd to econ phd to macro strat). However, have seen some equity fundamental analyst to macro equity/thematic pm to macro pm/strat as was mentioned. Most likely intuition is understand managing a book, evaluating risk/reward, and have a fx/rates specialist on their team
Thank you. in your observation of the transition from fundy equity analyst to macro equity PM to macro PM/strat, is the macro PM/strat you are referring to in this instance fx/rates PM? Or do you mean they are equity PM with some fx/rates layering involvement?
Thank you for the insightful answer. This is why I like WSO. Just 3 follow ups if I may.
1. When you say the tools of analysis are python/stats, can you give some examples of what you are looking at to derive trading ideas? For instance, in fundy equities, I may use excel to model out some new project of a company to see how such would affect EBITDA, cash flow/DCF, and valuation multiples. What are the analogous assessments you'd look at in regressions, PCA, econometrics for rates/fx? Just what to get a sense of how people even approach the analysis in this field and how one generates an edge (in equities, for eg. it could be about incorporating more complete fundamental information / assumptions in your company modelling that market's missed to better reflect reality)
2. Fair to say that long/short vol with options are very bread and butter play in rates/fx trading? (most long/short equities books are rather limited in option uses, so I just want to see if there are truly inherent contrasts between rates/fx and equities when it comes to options usage)
3. Lastly, how much overlap in analysis or variables are there between FX and Rates? My limited self-taught understanding with FX is that on the month-to-years timeframe, moves seems to be ultimately driven by inflation/interest rate expectations or monetary policy from the central banks. Day to day, risk aversion sentiment seems to play a part? It seems that rates move on these similar variables? If so, if you cover rates, your skills would be pretty transferable in FX; and vice versa? Just wondering if its accurate to analogize the analytical overlap between rates and fx to those between say equities and credits (equities focuses more on the upside whereas credits focus more on fixed cash flow, liquidation value and covenants, but you are still modelling the same company and essentially doing the same type of proforma projections, just stretching your scenarios differently)
Any thoughts would be appreciated again!
Removed for anonymity. Removed for anonymity.
Great advice
I've also had similar thoughts. Over the past 6-12 months I've tried my best to get up the curve on Macro fundamentals and have found some great resources.
I'd recommend you read this and find check out @MrBlonde_macro on twitter. He does a great job of explaining his process on the blockworks podcast.
Mind resharing whatever link you dropped was? Curious to check it out. And if anyone else has a primer on Macro fundamentals for rates/fx I’m sure others would be interested as well.
+1 Would be great if you could reshare that link
Sorry, the host expired. Here is the updated link.
https://www.dropbox.com/s/e0d07xkd4yngqeq/Lessons%20from%20Crises%2C%20…
Not in the space, or have any insights to even share, but what a breath of fresh air to see threads like this one with the knowledge sharing we're seeing here. Well thought out questions, and insightful responses. Learned some things in here today, +1 guys.
Rates are the primary driver of FX, and rates sales will have a significant foreign interest, which requires at-ready FX personnel. Also true about similar analytical approach (central bank watch, economic indicator data, etc.).
As others have mentioned, you don't need to be super quant-y off the bat, but if you take risk, you'll want to be intimately familiar with how your models work, where your edge is coming from, and how to quickly pull/distribute runs.
Yes.
Rates desk flow is massive.
Start as a jr somewhere.
Thank you. This is very helpful
Do you think a rates/macro PM would interested in adding a commodity vol trader to their team?
Generally no, but specifically perhaps. I’d say reach out to a couple in your network and ask for advice on where you might be able to add value.
Great info all around SB’d
https://macroisland.forumeiros.com/ New Global Macro community/forum, thought it would be a good idea to create a dedicated space
Ducimus modi veniam quia ipsam autem quod explicabo qui. A voluptas ipsum laboriosam voluptas quas corrupti. Ipsum tempore consequatur distinctio dolores suscipit ipsa iste. Rerum perspiciatis et itaque suscipit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...