With all of the various hedge fund strategies that managers employ, the global macro strategy is one of the broadest yet most detailed approaches used to garner sizable returns.
The global macro manager usually uses leverage to make bets on price movements in any market of the world, hence the term “global.” The term “macro” refers to the macroeconomic principles used by the manager to locate mispriced assets or market inefficiencies. Because the manager may choose to invest in any market, in any corner of the globe, the possibilities are endless, and may be as risky or as conservative as that manager chooses.
It was George Soros who first catapulted the global macro approach onto the headlines. His famous Quantum Hedge Fund used a global macro strategy to make him billions overnight, literally. In 1992, Soros made a bet that the Bank of England would not support the pound participation in the European Exchange Rate Mechanism by jacking up interest rates in a depressed economy. Soros was correct, and made his fortune when the Bank of England let the British currency devalue. Investors were delighted when Soros’ fund returned 30% a year between its launch in 1968 and 2000.
Other global macro funds have also fared well, repeatedly showing a low correlation to the general markets.Global macro trades can be either directional, where the manager bets on discrete price movements, or use relative value, where mispricings are highlighted between two similar assets, by betting on both the long and short sides.
Sometimes, a manger will correctly identify market inefficiencies, using a discretionary technique. When a computer is used to do this, it is called a systematic approach. Either way, it’s all about timing. The hedge fund manager must capitalize on this swing in equilibrium, make the proper bets, and get out at the right time. It is because of this limited window of time and risk that these hedge funds are able to produce vast returns in so little time.
Global macro hedge funds also exhibit a low correlation to the general equity market. While the exact amount of assets under management is not known, global macro hedge funds are estimated to manage over $150 billion in capital, with that number rising every quarter.