The macro definition is
the following: a macro hedge fund is a hedge fund that concentrates on finding
investing opportunities based on macroeconomic changes, usually at a global
level. Macro includes not only economic events, but political, and geopolitical
ones, among others.
For
instance, if there is civil war in Chile the price of copper is likely to rise,
given that Chile is one of the leading producers of the metal. In that case the
event is political in nature and affects a commodity price. If there is a
strike in mines in South Africa, it will affect the prices of precious metals
as new supply is restricted.
Weather
phenomena can also be classified as global macro. A large hurricane or typhoon
affects national economies, sometimes several economies and can have profound
impacts on GDP as well as specific companies. For instance, during Hurricane
Katrina, the local electric utility went bankrupt. In that case, it didn't
matter how solvent it was, how well its cash flow was being managed, the
hurricane did away with the company. A macro hedge fund manager paying
attention to this would have shorted the stock, or at least would have gotten
out of it. A value investor, possibly might have not paid attention to this
event and might have had to weather the hit. So paying attention to macro
events is important.
Another
example of macro investing were the events of the Arab Spring. When there was
instability in Tunisia and it was time to look at the region and short the
Egyptian stock market. Indeed it would have been a great move, but one would
have to have the foresight and due diligence to assess that it was likely to
happen. One would really need to have information close to the ground to be
able to short the market before it was front news in the major media. Some
people might say it was an easy prediction, but after decades of the same
leader it is certainly not easy to predict when the protests would overwhelm
the government in such a way. A similar reasoning could have been applied to
other countries in the region, like Syria, Yemen, and even Iran. There are many
events of a political nature that lend themselves to macro trading.
Other
examples of macro trading include elections. When Lula won the first time, the
markets took a dive as they were afraid of what policies the leftist government
would engage in. After markets were convinced that Lula was a moderate the
markets started its climb upward that was reinforced by the generalized rise in
the markets beginning in March 2003. In this case, it was not enough to know
that Lula was a moderate, but it was also necessary to see how others perceived
him at the time. That makes macro investing highly fascinating and challenging.
Another
election that had a measurable effect was the last election of Chavez. For the
first time in a while, markets had begun to rise in Venezuela as his health
deteriorated and there were signs of even an upset by the opposition. However,
after Chavez won, the markets again declined realizing that not even an ill
Chavez would slow down his revolution.
There
are many trading opportunities that arise from changes in the political
landscape of the world. An alert and diligent macro hedge fund manager would
greatly benefit from events like this, and there is no shortage of them. If it
is not one country, there is another with significant changes to impact the
market.
Not
only the weather, civil conflicts, and elections impact the markets, but
economic policy is also a very important macro factor that should be considered
by macro hedge fund managers. For instance, profligate spending is likely to
reduce the value of the currency as the government's balance sheet becomes more
compromised and there are greater incentives to print money. Increasing the
benefits of the population provided by legislation also affect the currency
negatively and the price of government bonds. The legislative process presents
any number of opportunities to profit from legal changes. sometimes it is
the increase of gasoline prices or tobacco taxes that affect a particular set
of companies. Other times it is a major reform that affect the country as a
whole. The congresses are in session only a fraction of the year so that avenue
of change must be scheduled in any macro hedge fund manager's agenda.
Macrohedge fund strategies run the gamut. This is only a sample of the subtopics and
it is definitely not exhaustive. A macro hedge fund analyst must delve deeply
into the topic, oftentimes developing strong relationships with government
officials. Sometimes macro hedge fund performance is influenced by this
contacts, as large funds have an advantage in being able to invest in their
network.
Macro hedge fund jobs are not easy to come by. There is not a standarized process by
which macro hedge fund analyst positions are filled, unlike some positions at
investment banks. The macro hedge fund interview is a key part of the hiring
process as it is only on a one-on-one conversation that the hedge fund manager
is able to gauge the aspiring macro hedge fund analyst's ability.
Macro
hedge fund performance 2013 has been interesting, and 2014 looks promising with
a change in the guard at the Federal Reserve, not only at the Chairwomanship
position but also at the Vice-Chairman position. It looks to be an eventful
year as the markets assess the new policymakers.
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