How do global macro funds generate investment ideas?
I'm currently interning in S&T at a BB and I'm really curious about global macro. I'll try to network with some alums for further discussion, but I would appreciate any insight from this forum. I understand they use a top-down framework, but the explanations I've read seem really opaque. For instance, what are the macro indicators HFs look at? Where do they get the data/research/news from? How do they decide which ideas to implement and how they all work together? Do they have some sort of internal system that analyzes the indicators (I was surprised at how "low tech" my trading desk is, it's probably not the same for buy-side investors right)? Essentially, I'm interested in how HFs decide what they're going to trade before they come to my desk.
it generally takes about 10 years of experience...reading lots of research over that time...understanding the concepts of investor psychology, the personalities of various central bankers and political leaders, understanding how to recognize different types of crowd behavior, ect....its a long road...just learn everything yo can about everything....its a big puzzle...and the great macro traders understand all the pieces
I think your question can frankly apply to many different strategies. But I used to have the same question before I got into the space and so will do my best to address it here.
Personally speaking (from my experience as a PM and having seen others), it's a mish mash of things. Everyone is different. Some are more fundamental and think about the world in 1 week to 1 year cycles and have a longer term view and try to work around that. Other folks literally look at charts all day long, or try to find mean reversion trades, or trade flow, others are news/gossip junkies, some travel all the time to observe trends (seriously) others do some kind of combination. Some folks have conviction, some don't and just try to play percentages (ie cut 6 losers fast and let the 4 good ones run). Some trade vol. Some trade quant. The other question is how you really express your ideas/views. Is it through Options? Spot? Rates? FX? Commodities? Equities (index vs single stock vs baskets)? Fixed Income? All of the above? Exotic instruments? Liquid ones?
Then there is plain old punting. Believe me, plenty of people, across all strategies do this. You would be surprised how many "Masters of the Universe" punt some random stuff. In that case it's most often ego...
Macro guys, just like 95% of other people in the industry (HF at least, across strategies) are nothing special. The returns are evidence of that (and this is a comment on the industry as a whole).
I hope this helps.
Good Luck
Here’s a paper by AQR on replicating macro hedge funds. I think this is the most in-depth answer you’ll get.
https://images.aqr.com/-/media/AQR/Documents/Insights/White-Papers/AQR-…
Most of the ideas are actually quite simple in how they are sourced, in that they are mostly visible to anyone who's looking at them.
For instance, since May '19 everybody got shocked and forced into seeing that the Fed will not only hold off on rate hikes, but will cut them. Till March even the Fed continued to believe that it will be continuing rate hikes. (With the Fed they themselves don't know that they will be heading to the direction they get dragged towards).
So for one to have bet in Jan for rate cuts, was any non public information required? No, not really. ED markets have been yelling at something deeply dysfunctional since last year May. One just needed to look at it.
You'd be surprised at how "low tech" buy side can be. The game is actually not just about ideas. But how can you execute it, and how can you further maximize your edge. That depends a lot on one's own curiosity.
I forget who was the person who said it, but he's a famous macro fund manager. In an interview he once gave an example of how he blindly just followed some other hedgie who mentioned that Soros was buying XYZ. He bought into it without doing any work, and of course it went South.
May 19 was 6-9 months late for realizing hikes were off the table.
Now the market in my belief is leaning too far to cuts. Perhaps priced right. But you can’t buy rates now unless you think we are going back to zero.
Macro funds aren’t all that different from drws or millennium now. They just emphasize different aspects more.
They all do some algo trading. All have signals desks. All have some guys with longer holds. Probably all throw in some fixed income relative value plays. All do some market making/day trading.
Macro though has changed a lot. Central banks have eliminated the economic cycle to an extent. Now you have to have a feel for passive flows and rebalancing etc. And a read on how the large quant funds trade.
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