Future of Global Macro

In recent times, global macro has not been doing so great, although at one time it was a very lucrative strategy. In the past 5 years, multiple big-name macro places have shut their doors due to bad performance. However, 2020 was a resurgence year for global macro funds as they outperformed the market. Nobody in the area really trades like they once did (take large speculative positions and hold them through turbulence), so how are today's global macro portfolio manager trading?

The future for the entire industry is not looking great but does discretionary macro have a worse future than fundamental equity l/s or do they both have a similar destiny. Will there even be the same number of discretionary global macro seats out there in 10 years or is the whole area going to shrink?

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Comments (24)

Mar 24, 2021 - 3:42pm

I think that in the future global macro funds are not going to shrink too much but they will become less discretionary and will rely on signals. However, traders will still be making the final decisions on which currencies to buy/sell and when. There is also probably going to be more macro seats in multi manager hedge funds as the general industry shift is towards that model. They will also become even more short-term orientated and this will not necessarily make it more technicals oriented as unlike equities there is lots of news coming out in every single currency pair all day. There is definitely still alpha to be generated in forex markets and they are not going anywhere.

Mar 25, 2021 - 8:41am

So the quants will dig out all of the signs for a potential investment and then the PM will make the final call. What about those global macro funds that trade on a very short term basis (intraday to day), is this still going to be around or will the HFTs ruin it? I figure that day trading fares better in forex than equities since there is multiple catalysts everyday to trade on. So despite equity intraday trading dying maybe it can still stick around in currencies.

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Mar 25, 2021 - 4:57pm

I think macro is going to be even more bifurcated than it is currently. Systematic funds are going to get faster and more markets to develop signals for, especially when using futures and more liquid cash equities/ETFs; I think the days of charging 2/20 for generic trend following or ARP-esque signals is going to fall by the wayside.

On the other hand, there's always going to be demand for discretionary macro traders, especially those that allow you to be long volatility (but not necessarily explicitly long tail risk); Brevan Howard, Element, Rokos, Caxton, etc. I think similar to systematic macro, the discretionary guys charging 2/20 while drawing down 10%+ in periods of stress are going to be left behind.

Just remember: it's not a lie if you believe it.

Mar 25, 2021 - 6:00pm

Dont you think that there is going to become many more firms that are a mix of systematic and macro where the algo generates signals and discretionary guy makes final decision. What do you reckon is going to happen to the funds that day/swing trade currencies based off catalysts.

Mar 26, 2021 - 9:10am

I think more and more firms are going to try to do what you suggest (blend systematic signal generation with manual execution) but I think the space is going to become even more crowded than it is currently, which inherently leads to lower returns. When you look at alternative risk premia returns, which is all that strategy really is, they've been inversely correlated with asset growth (especially in the past few years), especially post-2017 (2018 and 2020 were generally horrible for alternative risk premia).

Just remember: it's not a lie if you believe it.

  • Investment Analyst in HF - Other
Mar 25, 2021 - 7:29pm

Billymazee

...especially those that allow you to be long volatility (but not necessarily explicitly long tail risk)

Could you explain what you mean by this? I get it from an options pov but I doubt that's how they do it in macro. 

Mar 26, 2021 - 9:21am

You kind of hit the nail on the head, mostly focusing around using options - whether vanilla or exotic - to express high-conviction macro trades. If you're long optionality, you don't lose much if you're wrong, but when you're right you make a killing compared to using more linear instruments (say FX forwards vs. FX options). However, being long cheap optionality doesn't necessarily mean you're long tail risk (i.e. buying and rolling 25 delta OTM puts and funding via selling OTM calls, buying long-dated variance swaps, etc.)

Not sure what access you have to materials from these sort of discretionary macro guys, but I guarantee you that every discretionary macro PM worth his salt extensively uses options, since their trades generally have negative carry. They don't necessarily have to be exotics (digitals, barriers, lookbacks) but anything that can add convexity is becoming increasingly useful.

Just remember: it's not a lie if you believe it.

  • 1
  • Intern in PE - LBOs
Mar 26, 2021 - 10:59am

I understood about 0% of the items in your post - do you have any suggestion for how to read up on these? I am a generic PE guy with no finance background for context but would like to learn about what you're talking about.

Most Helpful
  • Intern in HF - Macro
Mar 26, 2021 - 1:12pm

Natenburg's Option Volatility and Pricing Strategies, Hull's Options Futures and Other Derivatives, and Krishnan's The Second Leg Down (one of my personal favourites).

  • Intern in PE - LBOs
Mar 26, 2021 - 10:57am

especially those that allow you to be long volatility (but not necessarily explicitly long tail risk)

Curious newbie here: could you describe what this means please? Thank you very much. 

  • Intern in HF - Macro
Mar 26, 2021 - 1:27pm

Long tail risk means you are betting on low probability and high impact events - in equity space this can mean betting SPX will go down significantly, in FX space it can mean betting a particular central bank will suddenly depeg their currency etc. You can certainly be long tail risk without using options, but most players do utilize options because its a cheap way to express your view without taking too much risk + the leverage component. Based on my knowledge if you are long tail risk you are (almost) always long volatility, but the converse is not true. Long vol positions can be as simple as buying straddles/strangles on TSLA if you think that the implied vol is cheap (take note that you are not necessarily long tail risk here). Maybe someone else around here with more experience can explain it more succinctly.

Mar 26, 2021 - 4:26pm

I work at a place undergoing a discretionary to more quanty transition as described by others here, but far less systematic than say Element or certain pods in MLP/ExodusPoint. On the contrary I think "Second-gen", rates and FX momentum trading in the form of say Alan Howard/Chris Rokos will have a resurgence given the reflationary regime we've entering. Macro traders like these with no stops, massive capital can do "mine, yours" all day long and will totally kill it.

Despite what's been said here, most typical "macro PMs" are really somewhere between RV and macro-RV, as the rates and FX world has become more and more positive carry, directionally independent, and many are still reeling from the recency bias of "lower rates for longer" and Draghi's "we'll do whatever it takes". Yet these guys got wiped out in the reflationary VAR shocks this February (7Y USTs auction tailing 4.5bps !!!!), quite like 2013's taper tantrum, as CBs are content to not do anything to fend off steeper (and increasingly bear flattening) curves, whilst the few purely directional, pay rates, long vol PMs probably smashed it.  

When this regime dies out (and I can't tell you when), you're going to find a mass of money returns to RV trading, which quants/python coders can more or less entirely automate, but with a discretionary PM using bond/bond supply technicals to figure out which flagged trades are sound. I think behavioural and seasonality strategies might start getting in vogue, such as seasonality and auctions strategy, but these are by no means "quanty", as a lot of these merely optimise and systematise what a normal PM has probably seen. 

Mar 27, 2021 - 3:59pm

RV vs Macro-RV isn't a formal definition, but I use it to differentiate between hardcore RV ie. structures like WN basis, TY vs TU Invoice Spreads, and macro structures that have some RV to juice up alpha, say instead of being paid 10Y GBP swaps vs USD, maybe do 5yx5y version or instead of buying a 5s10s CMS floor, maybe sell 5s10s OTM floors/5s30s cap spreads to fund. 

Bond supply is just bond supply, but calculations can include coupon payments, redemptions, CB buybacks. Bond technicals is just a generic term for technical bond stuff that you don't hear about in "directional trading", z-spreads, bond convexity, auction stats/srats etc, building spline par curves, p-strip/c-strips.

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