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
1. 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?
2. 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.)
3. 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.
4. 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?
5. Just for shits and giggles, how would one transition to FX/Rates from 8 years in fundamental equities?
Much appreciated,
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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!
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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
How much risk can BB sell side traders take in FX/Rates - Do the top 10% of BB sell side traders have very high sharpe ratios? I can't imagine they are taking much risk but for the risk they are taking, its outsized returns?
Depends on the bank. More risk averse banks will have you write up an email explanation every day that you swing more than 300k in PNL. When I was on the sell side a few years ago there were a few of us having PNL swings of 500k-2mm per day without any questions being asked. Of course, different story if it was a -3mm day or more but those were rare. I was lucky that I was in the right place at the right bank where risk taking was actively encouraged assuming you were consistently demonstrating that you could make money with those additional risk limits.
There are similarities but there are also differences in terms of what drives FX vs rates, both in the short-term and in the long-term. That is why there are often dislocations between the two which allow you to trade one against the other. Helps to remember that rates are in themselves just an absolute number while FX is a relative number between two currencies.
Data is increasing which makes it easier to quantitatively test a trading hypothesis. That being said, trading macro products goes beyond just understanding basic macroeconomic policies/fundamentals. Pure economists are some of the worst macro traders/PMs I have met. On the other end, pure quants are also some of the worst macro traders/PMs I have met. The main thing I think that matters is an instinctual understanding of how markets work and risk-reward. Everything else can be learnt.
Not necessarily true. Notionals are bigger and market depth is bigger for an average instrument in the FX/rates space relative to equities so in that sense, yes, you can probably deploy more capital into these markets. However, by virtue of the number of instruments available in the equities space, you can express a larger number of different trading hypotheses. In other words, there are more orthogonal trading opportunities.
These exist in equities space as well. It is easier to hold the size of position that is needed to make the PNL needed for that kind of comp in the rates space because the spectrum of outcomes is a lot more bounded and often the timeframe of the trade is also known. For example, if you are betting on what the Fed will do at its meeting next month, it's safe to know that the outcome is either nothing or a 25bp cut with a tiny chance of a 50bp cut assuming there is some tail risk type event. You also know that the outcome of 0 vs 25 is likely to be decided by the next unemployment/NFP print. If you believe you have alpha around the next employment print and also your understanding of the Fed's reaction function to the distribution of outcomes, it's pretty easy to hold a large position knowing your theoretically losses/profits and the time frame within which the result will be realized.
There's no easy way here. I don't think a direct transition will work at this stage. Move from fundamental equities towards equity indices and then towards macro from there.
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