I remember when I first got interested in finance I got a lot of useful information from this site, so I wanted to pay it back. I noticed there isn't a lot of content about Macro funds on this site (or really anywhere on the internet that I know of) so maybe this will help some people out.
We cover basically every asset class you can think of.I work on the qualitative/discretionary macro side on idea generation, not on the execution side.As an example, something I'm currently working on is the outlook for inflation and status of the USD as a reserve currency to determine what type of country exposures we want and whether UST rates will pop. I obviously don't have exclusive decision-making power, but my research is/has been influential in establishing new positions or increasing/decreasing the weight of different asset classes in our portfolio.I work directly with our PM (single manager) and have a lot of freedom in my research projects. He gives me a general direction that he wants me to go in, but sets me loose after that and checks in with me once a week to keep up with my progress. I spend most of my time researching fundamental economic data, market data, reading, and writing.
Any free resources (not Bloomberg) that someone looking to learn more about macro could use to get information and data from?
Like I said, many people are surprisingly generous about sharing ideas on twitter and you find a wide variety of viewpoints. Some of the best accounts are the sub-2,000 follower anon accounts. I tend to stay away from the big names (i.e. Howard Marks, Ray Dalio, Mohamed El-Erian, etc.) and stick with the people who aren't trying to uphold a reputation.
Aside from that, before I joined my firm I read a bunch of staff papers from the Fed, IMF, BIS, ECB, etc as well as some academic papers. I still do this pretty frequently. There's a lot of crap, but there are also some real quality researchers whose work is worth following. In no particular order I like Hyun Song Shin (BIS), Claudio Borio (BIS), Zoltan Poszar (Former Fed/Treasury/IMF now at Credit Suisse), Manmohan Singh (IMF), Jeremy Stein (former Fed), and Perry Mehrling (Boston University).
Even if you can't check the prices of stuff like CDS, FX basis, FRA - OIS, etc. you can still understand the mechanics of how these things work.
There's also some semi-decent podcasts available: JPM Rates, Macrovoices, Bloomberg's Odd Lots, etc.
In terms of data sources, you can use: tradingview and tradingeconomics to access most prices and economic data releases you might want. FRED from the St. Louis Fed is also great.
I don't think there are any books that cover macro from a practioner's perspective that well.
First of all thank you for sharing. Could you please share some examples of the Twitter accounts you like or think that are good? Thanks.
Sure, I'll try and describe as best as I can without going into too much detail.
The deliverable on most of my research projects is a report identifying some secular drivers of price action, the most important variables, and return expectations. Sometimes its not possible to give return expectations with any real degree of certainty and instead it will just be a general conclusion (i.e. "given our outlook for inflation in the US I believe this will be bullish/bearish for US rates, bullish/bearish for the value of the USD relative to EM currencies, etc.").
Notably at this point, I haven't really discussed prices. After we have a strong opinion on something that we think we might have an edge in, I'll do some basic scenario analysis with expected upside and downside given various cases.
After all this is finished it gets turned over to the quant team who monitor various signals to determine an entry point, stops, etc. and what instruments would make the most sense given our risk limits and investment horizon. I'm honestly not familiar with what they look at specifically. When they identify a good entry point (which takes anywhere from 0-6 months+) we have another discussion about how large of a position this should be in our portfolio (which depends on what instruments we're using and our degree of conviction). If we're using options/futures obviously our position will be smaller than if we were using something like ETFs. I have some input on the general time horizon that I expect the market to confirm/disconfirm my views over, but most of the execution choices are out of my hands.
Sometimes something changes during this process (either the market confirms my viewpoint which reduces future expected returns) or something big changes in the world (i.e. geopolitical). In that case, we reevaluate our thesis. If the fundamental/secular drivers still make sense, we'll keep it on the backburner looking for a favorable entry point in the future. If the fundamentals have changed, then we scrap the idea and move to something else.
After that it's just monitoring important updates, but I don't deal with the day-to-day position management. If there's a big development I'll revisit the idea and give my opinion on how this might change our outlook going forward, but that's it.
I was an econ major in undergrad so not a ton of technical skills but I took the basic math classes (Calculus I-III, Linear Algebra, Statistics, Econometrics, etc.). I mentioned to the commenter above that I took a single CS class. I definitely wouldn't say I have a lot of STEM oriented technical skills, but I can more or less understand the level of math used in most econ papers. That being said, I don't use any complicated math/statistics/programming on the job.
Tbh I think there's a huge lack of conceptual understanding in the macro world (for example: Why is QE not inflationary? What exactly are "bank reserves" and what function do they serve since there are no more reserve requirements since March 2020? Are low interest rates stimulative?) that is more crippling than a lack of technical skills.
When I think of Systematic Global Macro, I think of basically just using cross-asset correlations to make inferences about what type of market regime we are in and how that will affect various assets over a 3-6 month time horizon. There's no fundamental understanding here, its mostly/all just statistical inferences using macroeconomic data and asset prices and assuming that correlations that have held in in the past will continue to hold. There's value in this kind of analysis, and it can be profitable, but it's not my cup of tea. Something they might say is like "during the previous instances of QE and subsequent taper, equities had an average return of X% and govt bonds had an average return of X%".
The kind of quant stuff we do is very different. Like Ed Thorpe vs. Fisher Black/Myron Scholes.
I think in general, it's difficult to properly use both quant methodologies and financial/economic intuition. If I had to guess, I think that quant methodologies can add the most in regards to risk management but can't tell you when to initiate a position and why.
[Fuggernaut] I'm with you on this one. The importance of technical skills is often overstated (at least in this forum), but in reality there is a plethora of people who can code and do maths while there is a real scarcity of people who can have some informed opinion how the world works and the interplay of the world's economies, public policy and the markets. Not to mention the lack of knowledge of economic history and how we ended up where we are today.
Would you care to clarify what you mean with "Ed Thorpe vs. Fisher Black/Myron Scholes"?
Thank you again for the brilliant thread. For me personally one of the very best I have ever come across on here.
Thanks for doing this. Few questions:
1) What skills do you think differentiate a good macro analyst from a bad one? For value investing you could say ability to dig up and absorb information and for quant you could say pure mathematical horsepower, but for macro, I'm not sure what distinguishes the best of the best.
2) How's the work-life balance? It must be a small team, so do you feel lonely working there at times? If so, do you do anything to try to socialize more? I hear people working in small shops right out of college often like to join some hobby group or club.
3) What do you enjoy most about the job? Why did you choose macro instead of value investing / PE / LO HF? (I group these three together because they all do a similar type of fundamental research on specific companies and then invest in them.)
Appreciate your insights.
1. I think a good macro analyst will have a logical framework, a "map" if you will, that you can use to fit every other piece of data into and see what it changes rather than making individual inferences based on disparate data points. This is difficult to balance against being honest and not having religious adherence to something that repeatedly turns out to be false or misleading - so you have to constantly check your predictions against actual market behavior and make sure that what you infer is actually being validated.
For example, when I see RRP go up to a trillion at the same time as we see long-term yields falling and 4w/8w/13w bill yields fall below RRP - that screams collateral shortage to me. However others only looking at the rate of Fed balance sheet expansion and RRP usage along with the "money printing" narrative will immediately move to "too much cash." The truth is that it's kind of both, but IMO the cash side of things is far less important than the collateral side and "too much cash" is kind of a benign problem whereas collateral shortage can be very dangerous.
2. I think if you're worried about work-life balance this isn't really the job for you. Granted, I feel like I kind of lucked out and my team is pretty tight. We usually go to lunch together several times a week and I frequently message my PM during the week when I'm not working with interesting developments and vice versa. I typically spend maybe 40-60 hours per week in the office on average, but I'm almost constantly working and thinking about markets outside of the office so my total hours spent "working" per week is close to 90-100. I could probably get away without working that much, but I genuinely enjoy what I'm doing so it doesn't feel that much like work to me, and I think that I would lose a bit of my edge if I wasn't so obsessive.
In regards to loneliness, I don't know if I'm just weird/autistic, but I don't feel lonely at all and honestly prefer doing this vs. going drinking/clubbing every Friday/Saturday. I have a small group of friends that I stay in regular contact with, but for the most part I prefer to be working/researching/reading vs. interacting with other people.
3. There were a couple main things that pushed me towards macro vs. other types of fundamental investing. One is that I feel like many fundamental investors artificially limit their scope of opportunities. There's something to be said for circle of competence, but who says that circle has to be static your whole life/career? Aren't people supposed to learn new things and understand things they previously didn't have an "edge" in? It kind of hit me when I was in my final round interview for the LO HF and one of the PMs said something to the effect of "investing philosophies are kind of like religion." I thought that was an incredibly narrow way to view investing and antithetical to what the idea of searching for "alpha" is supposed to be. Two, sort of related to the problem above is that I think for the most part, equities are kind of a crapshot. Passive flows have distorted the equity market so much that it makes it difficult for an investor paying attention to fundamentals to outperform (see Mike Green's research on how passive flows make it difficult for active managers to outperform). People think macro is kind of a crapshot, and it is with respect to unexpected geopolitical developments, but IMO it makes more "sense" if you can fit the pieces together.
I think ultimately everybody is really a macro investor taking active macro bets, but some people are aware of this and some are not. If you're a LO HF analyst, you're likely betting on small-mid cap US equities, if you're at a PE firm you're betting on mid-market size levered US companies, if you're at a credit HF you're betting on private credit (CLOs, IG Corp, HY Corp, leveraged loans, etc.). Everybody's making a macro bet, why not open up your set of opportunities? Why limit yourself to just one part of the market?
That's the thing I enjoy post about this job, is that I'm not restrained. I can focus on what I think truly matters from a big picture perspective instead of trying to worry about whether this company's ROIC > WACC or whether we should buy at 7x EBTIDA with 3 turns of debt or if we can afford to pay 10x EBITDA with 5 turns of debt. Because honestly both of those strategies are going to get fucked if something like March 2020 comes around and there's no way to prepare or counteract something like that except hope that everyone believes the Fed will always come to the rescue and be able to save asset markets yet again. If you're not married to a certain ideology or type of investing then you can make money in every market regime, if you're correct.
Hi, thanks for doing this.
In terms of equity allocation, if you have a certain directional view, do you have to stick to ETFs to express it, or can you use direct stock investments if you have high enough conviction that there'll be certain winners within a broader sleeve?
Also, is your research process structured more thematically around potential secular trends, or do you start with catalysts that you've recently noticed and game out the implications, or even look at consensus and then break it down to see what the market's over-/underestimating/missing completely?
For equities, we don't have to stick to ETFs, but we usually do. As we grow our AUM, this will change as there won't be enough liquidity for our strategies, but there are advantages to using ETFs especially for expressing a sector/thematic view. Think about how the return of the S&P 500 is significantly greater than the return of its median constituent. I think something like the top 5 stocks outperform the S&P, the rest underperform, but the index does well because of survivorship bias. The same is true of most sector ETFs - over time you'll wind up owning more of the best performing stocks in an industry and your return could wind up higher than the return of even the top performing stock because these ETFs are constantly rotating the top holdings. Granted, this depends on the specific methodologies that a given ETF uses and you have to be careful with selection, but that's the general idea.
In terms of research process, it's a little bit of all three. Typically most of what we're looking at any given time has some type of potential catalyst or is timely/relevant. I think in order to properly understand most trades/investments you really have to look at all of these in detail. We don't tend to put on a position just because we think the market is overextended and vulnerable to a counter-move, usually there also has to be some sort of secular/fundamental driver which makes us more confident in our conclusion and provides a bit more flexibility if we don't time it exactly right. Many times, especially in today's market environment, there are moves which seem totally irrational but are always capable of becoming more irrational if there isn't a strong fundamental reason why they should not, which is one of the reasons why we tend to stay away from those types of trades.
I suppose you could do something like a DCF on the whole market, but I don't know how much value that would really add. Selection of a discount rate would probably be market regime dependent (i.e. a lot of people are justifying high levels of equity valuations b/c low interest rates), but once you get to the level of whole markets I think the idea of a DCF kind of stops being valid.
A few things regarding BTC:
1. I'm familiar with the stock-flow type models for BTC. The problem is that for these types of assets (precious metals included), is that at the end of the day they're only worth what someone is willing to pay for them (i.e. the don't have any intrinsic utility - they're just a scarce asset).
2. While you have El Salvador trying to adopt BTC as legal tender, the World Bank already said no to helping them. Moreover, you have far more countries who have outright banned bitcoin holding/trading/mining/exchanges (Turkey, Nigeria, Bolivia, China - this one is big, etc.). We're having a big experiment right now with the COVID vaccine passport issue seeing how willing people are to resist the government. I suspect that if developed world governments were to ban bitcoin that most individuals would not be willing to become outlaws or have the technological sophistication (putting their BTC in a wall in cold storage, etc.) to be able to actually utilize BTC in the way that a lot of BTC maximalists imagine.
3. The best future I see for BTC is if it gets utilized as a kind of reserve asset for some type of higher level blockchain protocol, but not as the actual medium of exchange. It's too slow and inefficient to be used as a medium of exchange and too volatile to be used as a real store of value.
4. Finally, I'm not at all convinced that the USD is going to collapse, kind of the opposite in fact. I think most people have a very poor understanding of what a world reserve currency actually is and what that entails. It doesn't just mean that oil or gold are denominated in USD. There are literally hundreds of trillions of dollars worth of financial contracts and securities that are denominated in USD. Nothing else has even close to the same amount of depth and infrastructure behind it. Fedwire/CHIPS process more than $1 quadrillion in payments every year. The international bank settlement system works through SWIFT and the correspondent banking network, which is all set up to use USD. The US Navy is the only military with the means to patrol/police the world's oceans and make sure that global trade and shipping is actually functional and possible so that there aren't constant hijackings.
Look at how much difficulty regulators are having trying to get everyone to just move from LIBOR to SOFR, which IMO is far simpler than switching from USD to RMB/EUR/BTC.
Countries and companies around the world issue debt securities and get loans in USD from non-US banks all the time because no other currency has the same depth or liquidity.
There's more than $6T daily turnover in FX markets, more than 3/4 of which has the USD on one side or another. The share of the USD in interdealer FX swaps (about $96T outstanding IIRC) is 96%. Non-US financial and non-financial institutions' own $ liabilities (both on- and off-balance sheet) are growing, not shrinking, relative to other currencies. This represents a recurring demand for dollars which basically amounts to a synthetic short position for everybody outside the US.
US T-bills are the best form of repo collateral and accepted all over the world at the lowest haircuts even in the worst kind of market environments. The only thing that comes even close to this are German bunds, which are mostly used in Europe. Long bonds didn't sell off in March 2020 because foreigners thought the USD was going to collapse b/c "money printing," they were trying to fund trillions of dollars of dollar-denominated investment portfolios and everyone herded into T-bills and on-the-run treasuries probably because their long bonds were being repudiated as repo collateral due to market volatility.
There's a lot more to this that I don't have time to get into here. If people are interested I might make a separate thread doing a brief overview of my macro framework.
Edit: Just wanted to emphasize that this isn't necessarily a bullish US growth argument. I just think that as of right now, there isn't a realistic replacement option for the current money/banking system - most of which happens to be dollar denominated. This is where I think defi might actually be disruptive, but that's probably at least 5 years down the road, if not further, and I haven't done enough in-depth research to definitively conclude one way or the other.
Thank you for the kind words! It's been difficult balancing humility as a fresh college graduate in a challenging field where most others have more experience than I do vs. coming up with unique, differentiated, and profitable market views and being confident enough to pitch those ideas. Although, I think having an objective scoreboard and seeing real-time feedback helps a lot in that respect (whether you're correct or incorrect).
Regarding the alluring (and perhaps enigmatic) nature of macro, I couldn't agree more. As I mentioned to another commenter, even though this is far from the path of least resistance I couldn't imagine myself doing anything else.
There's something special about macro that I think requires one to be an economist, philosopher, political-scientist, mathematician/statistician, trader, investor etc. all at once in a way that just isn't present in any other career (or maybe that's just my arrogance).
You should consider taking the IB route or pursuing further studies. The heydays of the likes of Soros and Brevan Howard are long gone. Qualitative macro is a dying breed and quant strategies is where AuM is increasingly flowing.
You might have missed this (or maybe I didn't emphasize it properly), but I work at at HF that one would consider to be, generally speaking "quantitative." Of the 5 investment professionals on our team (including myself), 4 are either primarily or exclusively quants. My PM is the only one aside from me who looks at macro themes, and he came from a quant background and learned macro by necessity. I think that even at many of these quant-oriented firms there is room for qualitative macro judgements because there have to be sensible inputs to the algorithms. That's the reason why my PM even brought me on in the first place (or at least so he said) - because he has to make qualitative judgements (aside from managing the algorithms) but he also needs to focus on portfolio management and talking to investors so he brought me on to assist with the development of qualitative macro themes.
I think there will always be room for intelligent discretionary macro strategy/investing/trading. Many of the traditional quant firms (like AQR, etc.) were very close to blowing up in March 2020 and even RenTech's public funds suffered $11B in withdrawals. Quant strategies, IMO, tend to do well in market environments that are by definition similar to the past. Qualitatively informed or driven strategies have the opportunity to really shine when there are fundamental or structural changes in the world that invalidate past experience. That's not to say that all qualitative strategies WILL do well in new/unconventional market environments, but its just that they have the capability of being more flexible and adapting to or anticipating change.
That being said, I understand your viewpoint and I spend a lot of time thinking about this myself. The conclusion I've come to after lots of internal debate is that so long as I'm actually good at my job and capable of adding value or making money for others - I'll be able to find a spot somewhere. I really can't see myself anywhere else, certainly not going back to IB. I fully understand that this is not the path of least resistance, but I'm not doing this because it is easy.
I have considered going back to school for a Masters/PhD, and might do that at some point in the future, (both as a reset and to pick up some more technical skills) but I'm not at that point in my life yet.
Updating this because it's been a bit over 6 months since I last updated this thread and I was lucky enough to have the opportunity to take a huge step forward with my career recently and thought people on WSO might be interested in hearing.
Have been grinding at my current position for close to 18 months now where I'm basically a generalist macro analyst advising a single PM of a pretty small fund. For anyone curious, since I last posted, my responsibilities have significantly increased. My PM trusts me more and has involved me in far more of the day-to-day portfolio management process.
Unfortunately, what I've also come to realize is that our investment styles aren't exactly a match, that I'm interested in trading different kinds of products than what we hold, and I've probably tapped out of my learning curve at my current seat. Not really worth getting too much into here, but suffice it to say that I want to move to a place where I'll have a chance to further develop skills that will help me become a successful trader/PM in the future - and my current fund is probably not that place.
Fortunately, I've been lucky enough to meet someone who has become a bit of a mentor to me, who trades products that I'm far more interested in, and would be willing to hire me with a direct line on his book down the road (i.e., the ability to run my own sub-book underneath him). To say that I'm excited about this opportunity would be a bit of an understatement - I've been grinding for a long time without great visibility as to what my career might look like in the future.
If anyone has any questions, I'd still be happy to answer. Not going to answer anything super specific to anything related to the fund that I'm going to in order to preserve anonymity, but willing to answer any general questions that people might have. Honestly, might not be of that much help given my relatively unconventional background, but some might find my experiences interesting and/or enlightening.
The best general piece of advice that I can offer is to just learn as much as you can and start writing down your own thoughts, publishing trade ideas, macro analysis, whatever. The more often you do this, the better you'll get and you have the opportunity to build a real edge or area of expertise. This isn't IB or PE where you can get by for very long without producing quality, original, actionable ideas - that's a muscle that you'll have to train and learn how to dig up information in unconventional places and think very deeply about how the world works.