Macro investment strategy, also known as global macro, is one of the most flexible and opportunistic strategies among all investment strategies. Macro funds aim to capitalize on market mispricings at the macro level before the majority of investors take notice. There are two main styles of macro investing – Discretionary and Systematic. The discretionary style relies more on subjective judgment and experience, while the systematic style follows a more disciplined, rules-based approach. This article will analyze how macro funds apply quant strategies and discuss some key characteristics of macro funds.
How discretionary macro funds incorporate quant strategies
Discretionary macro funds take a more subjective approach but still utilize quantitative models to aid their analysis. For example, they may use statistical models to analyze the relationship between macroeconomic data like GDP growth and equity index performance. After major macro data releases, discretionary macro managers can leverage signal processing techniques like Kalman filtering to glean trading signals from the data for entering positions in equity markets before most analysts fully digest the new information.
Systematic macro strategies rely heavily on quant models
Systematic macro funds operate in a highly quantitative, rules-based manner. Their algorithms and models are built on analyzing long-term market behaviors and relationships. Trend-following strategies are common among systematic macro funds, where models identify and trade on trends across asset classes. Risk premium strategies have also grown popular, such as systematically buying cheap value stocks while shorting expensive growth stocks per the Fama-French three factor model.
Macro funds trade global markets with leverage
Macro funds differ from traditional long-only strategies in that they trade global markets extensively and utilize leverage through derivatives to maximize returns. This global flexibility allows them to capitalize on opportunities across various countries, currencies, and asset classes. Macro funds can quickly enter or exit trades seeking mispricings, whereas traditional mutual funds are often constrained to specific geographies or asset classes.
Macro funds have varying volatility targets
Macro strategies can target a wide range of risk profiles. Conservative macro strategies such as fixed income carry trades exhibit lower volatility, while aggressive strategies employing high leverage have higher volatility. Macro returns can fluctuate significantly depending on the market environment and fund’s risk appetite.
In summary, macro funds employ both discretionary and systematic strategies, with an increasing focus on quant models in recent years. Their global scope, extensive use of derivatives and varying risk targets allow for flexibility in capitalizing on market opportunities.