Global Macro: Valuable For Institutional Portfolios

The Mekata Investment Group has published a white paper on global macro hedge funds, contending that a position in such a fund is a valuable defensive tool for an institution.

Global Macros are valuable because they perform best during turbulent or volatile markets, which is when defense is most needed, when “traditional assets” are likely to take their hits.

Separately, they have, the paper contends, “decent stand-alone risk-adjusted returns [and] attractive correlations relative to equities.” They also exhibit positive skew, that is, the curve representing their returns is asymmetric, allowing for frequent small losses and few extreme gains. All of that is helpful as an addition to a portfolio that “derives the majority of its risk and return from equity-like strategies.”

The paper is the work of Roberto Obregon CFA and W. Brian Dana CAIA. They distinguish three types of global macro manager, the discretionary, the systematic, and the tail-risk hedger. “Discretionary” means that “individuals, not computers, are responsible for the implementation of all investment ideas.” Systematic managers run quantitative strategies implemented by computer models.

Not long ago, one would also have characterized systematic global macro funds without further ado as “trend following,” since it would have seemed obvious that following trends is what computer models are good at.

But computers are good at a wider range of thing than they used to be, and systematic fund managers can now “implement the entire spectrum of Global Macro strategies (e.g. carry, relative value, etc.).”

Tail risk hedgers are those – whether discretionary or systematic – who hedge against market crashes or disastrous events, perhaps out of the conviction that black swan events are more common than (other) models expect them to be.“Unlike traditional insurance strategies, however,” Obregon and Dana add, “these funds should not be expected to lose money in all other market environments.”