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Global macro: innovation in the alternative investment strategies space

February 11, 2021

reading time: 5 minutes

by Andreas Vetsch, research analyst, LGT Capital Partners

supreme investment discipline

Global macro funds are considered the supreme investment discipline, but technology-based investment strategies and the macroeconomic environment are making life difficult for them.

The origins of global macro strategies, which are used by hedge funds and therefore come under alternative investments, date back to the early seventies. This investment style was first applied to a portfolio by the Commodities Corporation in New Jersey. It examined economic data and made decisions based on fundamental analysis. The best-known hedge fund that advocates this opportunistic investment approach is George Soros’s Quantum Fund. Soros rose to fame in 1992 by speculating against the inflated price of the British pound and the Swedish krona. The fund generated two billion US dollars within a few weeks.

In recent years, however, the importance of fundamental analysis in investing has declined because investors are increasingly using computer-based, systematic hedge fund strategies. With the help of trading algorithms, these strategies process traditional information more quickly and, thanks to big data technologies, can also precisely analyze comprehensive data sets. Experts estimate that as much as seven percent of the world’s three trillion US dollars in hedge fund investments flow from discretionary approaches such as global macro to systematic approaches each year.

Irrational financial market environment

The difficult macroeconomic environment is another challenge faced by investors who invest in global macro strategies. The financial market interventions of national banks around the world are making economic forecasts more difficult. Although central banks are increasingly deviating from their narrow focus on monetary stability and setting targets for the real economy, it remains difficult to assess the economic consequences.

In addition, global central bank interventions are causing the financial and real economies to decouple. One indication of this is the discrepancy between the VIX Index, which measures stock market risk, and the Global Economic Policy Uncertainty Index, an indicator of uncertainty in the real economy. The two indicators moved in lockstep until 2016, after which they diverged. Economic uncertainty increased sharply, while equity market risk fell to an all-time low in 2017. With the exception of the COVID-19 shock in the first quarter of 2020, the latter has remained at a low level. From an economic perspective, this is highly questionable. 

The efficient frontier

But although the importance of systematic hedge fund strategies has increased, global macro strategies should by no means be written off. The trend towards computer-based strategies also offers opportunities for global macro to experience a renaissance.

Against the trend towards computer-based strategies
Against the trend towards computer-based strategies

For example, more and more global macro funds are using systematic risk management approaches to minimize emotionally driven losses through predefined limits – making quasi-rational, situation-based and balanced decisions and thus avoiding human weaknesses. Some firms are going a step further. They are looking to combine the advantages of a systematic investment approach with those of a discretionary approach, and are partnering with data analytics companies to this end. With the help of visualization systems, they aim to support traders in analyzing and implementing positions. This combination of technology and human ingenuity could be a valuable driver of returns in the future.

Change as an opportunity

There is no denying that the last several years have been difficult for global macro managers. However, many funds have risen to the challenge and adapted their portfolios to the new environment. The combination of traditional fundamental analysis paired with systematic approaches offers a good basis for the future of this alternative asset class. It would thus appear that the signs of the times have been recognized and that the supreme investment discipline is evolving in the spirit of the adage that if you stop improving, you stop being good.

Pictures: crown: iStock; boats: Shutterstock

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