Macro funds are one of the most flexible and opportunistic alternative investment strategies that come in many forms such as trend-following, systematic or discretionary strategies, or a combination thereof.
What's trend following?
Like surfers riding a wave, trend-following strategies aim to identify a trend that's already formed and then follow it. A trending market is defined as a price series that continually closes either higher or lower on average over a defined number of periods. Trend-following strategies use technical analysis (changes in price and statistical data points) to identify directional price moves across different markets and assets, and will aim to find a low-risk entry point to a trending market or asset.
Analysis of an upward or downward trend trajectory will lead a strategy to use long trading positions on the conviction that the market will rise, or short trading positions if taking a view that the market will drop. Trend following is an intermediate- to long-term strategy, as the longer a trend continues, the greater the opportunity to add outperformance. Trend following is often associated with quantitative trading, in which algorithms are used to analyze hundreds of individual data points that may highlight a trend forming within an asset class or market.
What's a systematic trading strategy?
Systematic trading strategies use quantitative—and often proprietary—algorithms to trade across asset classes and markets. Systematic trading aims to approach trading decisions methodically based on clearly defined risk parameters, asset price ranges, and investment goals. Technical analysis of market data, such as price and volume information to detect market trends or mispricing, is often a feature of systematic trading strategies. Systematic trading can include high-frequency trading or slower types of trading such as trend following.
What are discretionary macro funds?
Discretionary macro funds rely on a portfolio manager, or a team of portfolio managers, instead of an algorithm-based systematic trading strategy. Discretionary trading uses fundamental analysis based on macroeconomic themes to predict market direction and to help construct portfolios and trading strategies. Discretionary macro funds trade the same markets as quantitative macro funds but use different analysis, outlooks, and parameters to anchor trading decisions.
Are there other types of macro funds?
Within the global macro fund category, there’s almost as many different types of strategies as there are funds. Macro funds can combine discretionary and systematic approaches, as well as fundamental and technical analysis, to create unique subsets of strategies that can invest across varying time horizons.
In addition to systematic trend following, macro funds may also use carry trades, which involve borrowing in a currency of a country with low interest rates and investing in the currency of a country paying higher interest rates. In our article on carry trades, we highlight that one of the most commonly traded currency pairs is borrowing in Japanese yen and investing in Australian or New Zealand dollars.
What's the ideal market environment for global macro funds?
Because macro funds invest on a thematic macroeconomic basis globally using a combination of underlying trading strategies, they depend on continuous market movements. Periods of sustained volatility are an ideal environment for these types of funds, particularly if volatility is driven by broad macro factors, such as geopolitical risks, rising interest rates, or rising inflation. Environments in which macro funds may face challenges on a relative basis are periods of continued low volatility, as well as periods of low and stable interest rates and inflation.
That said, global macro strategies can vary significantly from each other and perform differently under different market conditions and over time. Investors should aim to diversify among alternative strategies as they'd diversify across traditional asset classes.
Source: Morningstar, John Hancock Investment Management, October 2022. Diversified alternatives are represented by the Wilshire Liquid Alternative Index, which tracks the performance of the five liquid alternative strategies that make up its universe. Equity hedge is represented by the HFRI Equity Hedge Index, which tracks multistrategy investment managers who maintain long and short positions of no more than 50% in primarily equity and equity-derivative securities. Equity market neutral is represented by the HFRI Equity Market Neutral Index, which seeks to profit by exploiting pricing inefficiencies between related equity securities, neutralizing exposure to market risk by combining long and short positions. Macro strategies are represented by the HFRI Macro Index, which involves investing by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange, and physical commodities. Merger arbitrage is represented by the HFRI Merger Arbitrage Index, which involves investment in event-driven situations such as leveraged buyouts, mergers, and hostile takeovers. Relative value is represented by the HFRI Relative Value Index, which maintains positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. It is not possible to invest directly in an index. Diversification does not guarantee a profit or eliminate the risk of a loss. Past performance does not guarantee future results.
Portfolios that have a greater percentage of alternatives may have greater risks. Diversification does not guarantee a profit or eliminate the risk of a loss. Past performance does not guarantee future results.