Macro investing refers to making investment decisions based on macroeconomic trends and events across countries, regions, and global markets. It involves top-down analysis of major economic indicators, geopolitics, policy changes to identify opportunities to go long or short different asset classes like equities, bonds, currencies and commodities. Macro investors can use both discretionary approach where investment decisions are made based on subjective assessment of macro themes as well as systematic strategies where models and algorithms are used. Macro funds often use leverage through derivatives like futures and options to amplify returns. Macro investing provides diversification as it has low correlation to traditional asset classes.
Macro investing focuses on macroeconomic and geopolitical factors rather than individual securities
Unlike traditional stock picking strategies that focus on fundamentals of individual companies, macro investing relies on assessing big picture trends and events. For example, a macro investor might short Australian dollar if they believe China’s economy is slowing down which would hurt Australia’s export-oriented economy. Or they might buy gold futures if they expect rising global uncertainties like trade wars or oil supply shocks.
Macro strategies can be discretionary based on investors’ subjective views or systematic based on models
Some macro funds take discretionary approach where investment decisions are based on investors’ subjective assessment of macroeconomic trends and events. For example, a discretionary macro investor might go long Brazilian stocks if they expect reforms to stimulate growth. Other macro funds take more systematic approach of developing models and algorithms to identify trades. For instance, a model might detect trending behavior in commodity prices to trade futures.
Macro investing provides diversification with low correlation to traditional assets
Macro strategies can invest long or short across a wide range of global markets in equities, bonds, currencies and commodities. This dynamic asset allocation provides diversification for a portfolio. Also macro strategies have low correlation to directional moves in traditional assets like stocks and bonds which helps manage risk.
Macro funds utilize leverage through derivatives like futures and options
Macro funds make extensive use of derivatives like futures, options and swaps to implement their trading strategies. Derivatives provide leverage so macro investors can put a small amount of capital at risk but get exposure to large market moves. For example, shorting bond futures allows betting on rising interest rates without needing to borrow large amounts of capital.
In summary, macro investing focuses on top-down analysis of macroeconomic and geopolitical trends rather than fundamentals of individual securities. Macro funds can take both discretionary and systematic approaches. Their flexible global mandate and use of derivatives leads to diversification benefits but also risks from leverage.