Specifics of trading style in Macro hedge fund?

I'm well aware that a macro hedge fund is designed to 'trade globally based on economic theory' but I doubt that PM's at these funds are prepared to take long term trades founded purely on macroeconomic predictions, as this would result on very few trades and I imagine a low success rate (It's hardly easy predicting the future; just look how badly economists do it).

So what else is going on? What are traders at these firms actually doing? In reality are traders actively trading the markets with a fundamentally technical perspective and occasionally supplement this outlook with a specific view of where the markets are heading? And if so, what separates this from the work of a day trader, except experience/technological support/resources?

I'm not trying to insult this industry, quite the opposite. Macro PM's are viewed as some of the smartest guys out there and the numbers themselves speak volumes about how successful these strategies can be (admittedly low volatility in the last couple of years has dampened profits but that looks likely to change). I just want to get a better understanding of their investment philosophy.

@Bondarb (You always seem to have very useful insights)

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Comments (29)

Jan 28, 2015 - 10:37am

If you're really curious about modern day Macro Trading, consider this book by an author who worked at Tudor and AQR. http://www.amazon.com/Global-Macro-Trading-Profiting-Bloomberg/dp/11183…

There are 2 ways to make money: 1. being right, 2. good risk management. Being right is difficult (probably no better than economists' forecasts), so that brings us to risk management. One of the important things for macro traders is to lose a little bit of money each time they're wrong, and make a lot of money when they're right. If they're right 35-40% of the time, they end up making money cause the gains when right exceed the loses when wrong.

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Jan 28, 2015 - 11:20am

Thanks, I'll try pick a copy up (or find the pdf online).

I get that and have heard some of it before. Acting in very global markets with large amounts of liquidity allows one to drop in and out of a trade relatively easily, so if things look like they're going pear shaped you can quickly take the loss and wait for another opportunity. I also appreciate, as again allot of people have said similar things, that risk management is a factor which commonly defines the quality of a trader.

What I'm unclear about is what initially makes a macro trader decide to trade? There can't be that many really solid macroeconomic investment theme's which aren't rather already priced in or massively overcrowded for a macro trader to work with; and even if there are I imagine that they don't require much active work to set up and maintain (if you think dollar is going to rise over the next year then buy dollars and then sit on your ass for a year). So what do these PM's do all day?

Obviously this process is far more complicated than I'm suggesting and this misunderstanding stems from my ignorance on this topic which is why I'm hoping someone can explain this process in a little more detail.

Cause who wants to be in the 99%?
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Jan 28, 2015 - 11:43am

LeadBalloon:

What I'm unclear about is what initially makes a macro trader decide to trade? There can't be that many really solid macroeconomic investment theme's which aren't rather already priced in or massively overcrowded for a macro trader to work with; and even if there are I imagine that they don't require much active work to set up and maintain (if you think dollar is going to rise over the next year then buy dollars and then sit on your ass for a year). So what do these PM's do all day?

Oh, there can't be? Weird. Do you even follow the markets?

There are many ways to play the macro game... some have a speed edge, some have a risk edge, some have an information edge, some have a forecasting edge... there isn't "the one way" for macro, just as there isn't one way to fundamentally invest.

Best Response
Jan 28, 2015 - 3:38pm

How would you implement a dollar long strategy? Do you simply short EUR, GBP, JPY, CAD, and AUD? Take a look at JPY. You'll see that most of its depreciation against USD occurs in brief spurts of 1-2 week periods. The rest of the time it just zig-zags. The PM's job is to try to capture the big swings and stay out during the zig-zags, as those are very expensive moments. What if you get a series of poor economic indicators? Don't you think that might hurt US equities?

I suggest looking at an economic calendar. Every country has multiple statistics on employment, inflation, GDP, manufacturing, trade, retail, consumer, financial flow, and the list goes on. Every country has fiscal and monetary policies, setting government spending, interest rates, quantitative easing -- these all have huge impacts and news comes out almost every day. These form a picture, a theme. If you get a mix of reports, the theme isn't so clear. PMs analyze charts, econ indicators, talk to numerous sell-side analysts, build models, organize models. Just building charts of everything that's coming out is incredibly time consuming.

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Jan 30, 2015 - 12:01am

ThinkMacro:
Take a look at JPY. You'll see that most of its depreciation against USD occurs in brief spurts of 1-2 week periods.

i get ur point but price action develops over multi-month periods/ quarters. not 1-2 weeks... some macro managers have twitchy fingers, but not all. there is no singular approach and a large part of macro is finding a style that fits ur market philosophy and personality.

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Jan 30, 2015 - 12:01am

ThinkMacro:
Take a look at JPY. You'll see that most of its depreciation against USD occurs in brief spurts of 1-2 week periods.

i get ur point but price action develops over multi-month periods/ quarters. not 1-2 weeks... some macro managers have twitchy fingers, but not all. there is no singular approach and a large part of macro is finding a style that fits ur market philosophy and personality.

Jan 30, 2015 - 12:01am

ThinkMacro:
Take a look at JPY. You'll see that most of its depreciation against USD occurs in brief spurts of 1-2 week periods.

i get ur point but price action develops over multi-month periods/ quarters. not 1-2 weeks... some macro managers have twitchy fingers, but not all. there is no singular approach and a large part of macro is finding a style that fits ur market philosophy and personality.

Jan 30, 2015 - 12:01am

ThinkMacro:
Take a look at JPY. You'll see that most of its depreciation against USD occurs in brief spurts of 1-2 week periods.

i get ur point but price action develops over multi-month periods/ quarters. not 1-2 weeks... some macro managers have twitchy fingers, but not all. there is no singular approach and a large part of macro is finding a style that fits ur market philosophy and personality.

Jan 30, 2015 - 12:01am

ThinkMacro:
Take a look at JPY. You'll see that most of its depreciation against USD occurs in brief spurts of 1-2 week periods.

i get ur point but price action develops over multi-month periods/ quarters. not 1-2 weeks... some macro managers have twitchy fingers, but not all. there is no singular approach and a large part of macro is finding a style that fits ur market philosophy and personality.

Jan 28, 2015 - 4:14pm

Also at any given moment, a discretionary PM might have a dozen or more trades on, more if they have analysts or junior PMs who trade certain markets. Their job is to keep track of all of these trades. A long USD trade involves keeping track of not only the U.S.'s financial strength, but also the weakness of the countercurrencies' economies. One black swan event (like Swiss National Bank removing their cap) can adversely impact the entire thematic trade. Timing should actually be added to my list of ways to make money, and so much of what a PMs day-to-day is about timing things, entering trades when they think the opportunity is there and exiting when it isn't. Once a trade is on, they need to monitor all the risks around it, analyze what's going to move it up or move it down.

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Jan 28, 2015 - 6:27pm

Great answer, that's exactly the sort of response I was looking for. +SB

So if so much work goes into one investment theme how many different themes will a PM be running on average?

Cause who wants to be in the 99%?
Jan 28, 2015 - 8:40pm

The macro trading book by Gliner is not that good, imho, so save yourself time looking for it. It is a compilation of risk management, technical analysis, risk premia and main asset classes overviews. With all that stuffed in 300 pages and no depth, I'd rather pick specialized books on those subjects.

I am also disappointed that the author uses his experience at funds as the main selling point, but there is no unique insight whatsoever and this book could have been written by anyone with some trading experience.

Jan 31, 2015 - 10:18pm

I'm surprised no one has mentioned the Alchemy of Finance by Soros. Still a great book that deconstructs classical economics / statistics and basically gives you a blueprint for arbitrage. Its a bit philosophical though so don't think you'll skim it and make a million, its a pretty intensive read.

One thing you should look into if you do read Soros is the topic of reflexivity. After reading, I think you will have a very different view on the "efficiency" of markets and mispricing in general.

As for macro trading in general, the topic is so broad you'd almost have to narrow it down to get a useful answer. As others have mentioned you have FX...rates...tons and tons of options and derivatives of every kind to tailor to your specific view and strategy. Binary options are a pretty simple product to look at when it comes to FX. If its ITM at payout, boom you can make 10x initial investment in a few short months. If OTM, you only lose upfront premium. This can be a pretty quick way to implement your views on the direction of an economy, simply by looking at equity index / currency.

Jan 31, 2015 - 9:42am

I had the chance to speak with a partner at a $2B+ global macro fund. The origination of his trades vary. He was short the yen in the second half of last year based on his talks with different members of the BoJ and what he thought they would be doing (ie a qualitative assessment). The also had a short 5 year inflation, long 10 year inflation based on oil reducing prices in the short term, but stimulating the economy in the long term. It was favourable because of the pricing of TIPS and other inflation linked products at the time (qualitative and quantitative). The last trade was an interest rate - volatility arbitrage trade. The idea was that interest rates are a measure of risk, a similar risk to the implied volatility traded through options. They had a bunch of statistical analysis suggesting a mis pricing between LIBOR futures and different options contracts so they went in on a relative value trade between the two.

Apparently though the majority of people at these funds are quants. The trades are easy to come up with, it's the execution and risk management that are the the most difficult.

Jan 31, 2015 - 6:54pm

Looking for Advice:
He was short the yen in the second half of last year based on his talks with different members of the BoJ and what he thought they would be doing (ie a qualitative assessment).

Lol @ giving a rationale for that first trade as if it wasn't the most obvious thing in the world. The other two are interesting even if they're simple.
Feb 2, 2015 - 5:49am

Do any of these GM funds have any positions for graduates. I know most come from sell side/research/academia/central banks but does anyone take on young guys with no experience?

Cause who wants to be in the 99%?
Feb 5, 2015 - 8:24pm

Great post above with varied insight. ThinkMacro hit the nail on the head, trading all depends on various factors timing being the most important. I am a macro guy myself and knowing how the 'global machine' works and when levers are pulled and pushed and how they impact the global economy is crucial. One thing that I didn't see mentioned above was the ability to pick-off momentum trades ie. the last 2 days vol in Crude has been ~10% and as one can see you can trade to make very quick profits in highly liquid markets visa-vie futures on Crude. Obviously this isn't a long-term strategy but one used to capture momentum of short squeeze's or drastic changes in supply and demand dynamics ie. having 95% confidence that OPEC wouldn't cut supply in the Oct/November meeting.

Likewise technical signals ie S&P this year continues to bounce higher when testing the 2000 mark; as one can see over the last year the market has been pre-disposed to constantly buy the dips. If you are clever and want to profit form the momentum/swing you buy S&P (I am making numbers up to make my point) On Monday the S&P opens under 2000, you wait for 1995 and buy with a stop at 1988 (or w/e based on your risk appetite) and wait for it to rally as you line it up with a NFP print at the end of the week; which you have strong conviction due to other factors that it will be a consensus beating print.

One great primer/research piece is this Ray Dalio doc:

https://www.bwater.com/Uploads/FileManager/research/how-the-economic-ma…

Enjoy

- Only time will tell....
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Feb 5, 2015 - 11:38pm

koske made a great point about some of the types of that goes on at a macro shop.

and actually, you see guys trading around in the most liquid market all the time based on momentum, technicals, headlines, and etc. sure they may trade within the broader view/theme that they have assigned to the market place, but you would be surprised by the amount of directional bets placed on deep liquid markets all the time.

lot of macro shops have turned into a giant prop shops with tight tight tight tight risk controls. so you dont really see guys betting based on the real heavy stuff where the thesis may take a year to play out, let alone three months. most would lose their seat if they were down even 5% while they wait for it all to play out.

the days of PTJ, Moore, Soros and etc, sticking their neck out based on their hunch/analysis on a potential seachange are long gone.

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Feb 5, 2015 - 11:42pm

for example, ive been selling S&P since December whenever the market hit a trend line of lower highs (if you pull out a six month chart of the S&P, you will see it). I did that until it stopped working, which was actually yesterday when it finally broke out (with the Dow first breaking out ahead of the S&P).

but now i'm up a few hundred basis points to start the year. according to my firm, I'm supposedly a "macro trader"... well... selling S&P based on a trading range is something a monkey can do. whatever, ill take it lol

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Feb 15, 2015 - 6:30am

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