Global Macro

I recently read inside the house of money and have become very interested in global macro investing. In my personal trading account I’ve sold most of my stocks and am now trading based on more macro themes. I’d be interested in creating an offline group to discuss various investment strategies and themes that others may have who share the same interest. If this is of interest to you, please email me at thanks

If you have some “cfa skills” why do you choose to pursue macro/theme based investing instead of a bottoms up style company analysis?

virgin, just cause you have CFA skills doesn’t mean you can’t do a macro theme. one has nothing to do wtih the other. its all about preferences.

if 90% of an investment’s return is based on the asset class, then why spend the majority of your time doing bottom up security analysis? or do you assume that it is a given that US equities are the best asset class to invest in and therefore it makes sense to try to add alpha with security selection? also I prefer reading the economist over a 10k

They can’t possibly measure that “90% of return is from asset class”. That is certainly not true for me. How do you measure that? Maybe that applies for some dump mutual fund that are stuck following institutional management guidelines? Anyway…you’re right it is a preference thing. Either the top or the bottom, they’re just a starting point. As a value investor (and a sicko pervert), I choose to look for good bottoms and frequently find them. Once I bought a company that was trading at 50% of it’s cash value. Then the company became trendy (i.e. macro investors thought it was cool)… my net return was 1400%. The company still hasn’t made a dime! It has less cash than it did when I bought it. I guess I am a macro investor. Nevermind.

Inside the House of Money is a good book. I liked it very much, and I’m trying to do more macro based investing (would love to work for a macro fund). If you do form a group, let me know. You can write me at brucebiz_wi at that yahoo place. Just make sure that you make the subject line clear that you’re from AnalystForum, because I get lots of spam at that address and sometimes miss real mail because of it.

One thing you get from the book is that most macro traders don’t have that many investment or trade ideas on at one time - maybe they have one or two good ideas per quarter. Contrast that with some of the high-frequency trading and statistical arbitrage guys, who might be putting on 100s of trades per day, based on tiny mispricings. As a result, global macro trades probably sit there earning cash-like returns much of the time, waiting for big swings and changes in the economic landscape. Therefore, even though the macro funds can obtain high sharpe ratios, the volatility can be quite high. I had some gold, energy, US dollar, and short mortgage bets going on for a while now, and I waited some good 9 months while it didn’t do all that much (well, energy was ok), and suddenly BANG, we had that shift, and I have bigger smiles on my face (now the question is when to take the trades off). So it’s a balance between the continual change-wringing process of arbitrage funds vs the “plan for the future global shifts” of the macro funds. I’ve decided that the fund-of-funds mechanism might be the best way to combine the two after all.

virginCFAhooker Wrote: ------------------------------------------------------- > They can’t possibly measure that “90% of return is > from asset class”. That is certainly not true for > me. How do you measure that? Maybe that applies > for some dump mutual fund that are stuck following > institutional management guidelines? Not only can they measure that, they do. (L3 performance attribution LOS’s demonstrate how.) Vanguard has done a study showing asset allocation accounting for 102% of return; the rest is “added” by managers. When you find the majority of funds not beating their benchmarks, this is incredibly easy to believe.

tthey measure it by factor analysis…

I went to a talk a few years ago by the SQA (Society of Quantitative Analysts) that pointed out that the original research that had some rate like 90% of returns variation was accounted for by asset allocation had to do with cross sectional data. They pointed out that if you look at the returns longitudinally, you get a much lower (though still substantial on an absolute scale) rate of attribution. I don’t remember the argument, but I do remember the conclusions were that 1) the 90% (or approximate) figure is correct if you measure a certain way, and 2) the conclusion that security selection doesn’t matter is not appropriate more generally. I think the 90% figure comes from using one of the Brinson attribution models, which I seem to recall uses an anova-like method to attribute asset class effects, and then says “the rest of the variance comes from security selection.” It’s not presented exactly that way, but it more or less boils down to that. Wait… there is also an interaction effect between security selection and attribution, so there is an extra thing I’m forgetting right now - oh, yeah, it’s a two-way anova. Also, if your mandate is to manage money within a specific asset class, then you have no ability (other than swaps and overlays, if your mandate allows it), to change your allocation to a different asset class, and so naturally security selection will be your main tool for keeping your job.

Darien & Frank… I just passed L3 so I understand how they measure attribution. That is a different situation. You’re talking about measuring a mutual fund’s slight deviation from an index that it was designed to track. It’s very different from telling me that 90% of my returns are from asset class selection when I could care less about asset classes.

not trying to be a d!ck, but there has been quite a few academic papers on this which, if I remember correctly, are sited in tha cfa readings a couple of times. It’s actually not hard to measure using a fairly simple regression… My question to Bob5 and Bchadwick, how do you know you’re going to be right on this stuff? It seems like you’re cutting out a lot of diversification by switching out of stocks, so how do you know you’re making the right call? Sure it’s interesting, but does that make it easier? It seems like you’re moving to more actively traded markets with less diversification, so you’d need a fairly strong edge to be successful…

I read the WSJ, FT, Barron’s, Economist, CNN, etc. I will do this regardless of what I am doing investing wise. I can take what I learn from these sources and whatever else I experience in everyday life and try to apply it to investing. With that base knowledge and some additional research I feel like I can do much better than starting from scratch doing bottom up quant screens. Non to mention that I don’t have the time it takes that I feel is necessary to successfully run a stock portfolio. I’ll still get equity exposure (if I want it) with ETFs or non-diversified MFs. A big reason why I am doing this is because I am not very optimistic about the US economy. Therefore I am looking to *diversify* my investments outside of US equities and invest in securities/funds that have low correlation to the US equity markets. Regarding the “fairly strong edge to be successful…”. I think that applies more to try to pick a US large cap stock that beats the S&P 500 than to make a call like international equities will outperform relative to the S&P 500 over the next 12 months.

In international equities you still have a fairly strong correlation to the US markets, and you’re also running more of a risk of flight to quality if a global recession hits. Not that there’s no way for that trade to be profitable, I just think it can easily blow up in your face, but hey, if you like it and it works for you, good luck…

FTR, some academic references from : The importance of asset allocation decisions has been widely studied in the finance literature (Jahnke 2000, Elton and Gruber 2000). Perhaps the most cited and (mis)quoted study on this subject is the Brinson, Hood and Beebower (1986) study, (and 1991 and 1995 studies by Brinson and Beebower with Singer) of pension plans, which show that the asset allocation decision can explain close to 90 percent of the variability of returns over time. Ibbotson and Kaplan (2000) extend the conclusions of Brinson et al. by showing that the asset allocation decision explains around 40 percent of the variation of returns across funds and 100 percent of the variation in the aggregate. Bibliography Arshanapalli, B., D. T. Coggin and W. Nelson. “Is Fixed Weight Asset Allocation Really Better?” Journal of Portfolio Management. 27, 3 (2001): 27–38. Bengen, William P. “Asset Allocation for a Lifetime.” Journal of Financial Planning. 9, 4 (1996): 58–63. Bierman, Harold Jr. “Portfolio Allocation and the Investment Horizon.” Journal of Portfolio Management. 23, 4 (1997): 51–55. Bodie, Zvi. “On the Risk of Stocks in the Long Run.” Financial Analysts Journal. 51, 3 (1995): 8–13. Brinson, Gary P., Randolph L. Hood and Gilbert L. Beebower. “Determinants of Portfolio Performance.” Financial Analysts Journal. 42, 4 (1986): 39–45. Brinson, Gary P., Brian D. Singer and Gilbert L. Beebower. “Determinants of Portfolio Performance.” Financial Analysts Journal. 47, 3 (1991): 40–48. Brinson, Gary P., Brian D. Singer and Gilbert L. Beebower. “Determinants of Portfolio Performance II: An Update.” Financial Analysts Journal. 51, 1 (1995): 133–138. Canner, Niko, Gregory N. Mankiw and David. N. Weil. “An Asset Allocation Puzzle.” The American Economic Review. 87, 1 (1997): 181–191. Chieffe, Natalie. “Asset Allocation, Rebalancing and Returns.” The Journal of Investing. 8, 4 (1999): 43–48. Davidson, Russell and James G. MacKinnon. Estimation and Inference in Econometrics. New York: Oxford University Press, 1993. Elton, Edwin J. and Martin J. Gruber. “The Rationality of Asset Allocation Recommendations.” Journal of Financial and Quantitative Analysis. 35, 1 (2000): 27–42. Ibbotson Associates. Stocks, Bonds, Bills and Inflation 2001 Yearbook: Valuation Edition. Chicago, Ill.: Roger Ibbotson and Associates, 2001. Ibbotson, Roger G. and Paul D. Kaplan. “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?” Financial Analysts Journal. 56, 1 (2000): 26–33. Jahnke, William W. “The Importance of Asset Allocation.” Journal of Investing. (Spring 2000): 61–64. Jones, Charles P. and Jack W. Wilson. “Asset Allocation Decisions—Making the Choice Between Stocks and Bonds.” Journal of Investing. 8, 1 (1999): 51–56. Kennedy, Jr., William, J. and James E. Gentle. Statistical Computing. New York: Marcel Dekker Inc., 1980. Kritzman, Mark P. “What Practitioners Need to Know—About Time Diversification.” Financial Analysts Journal. 50,1 (1994): 14–17. Koskosidis, Yiannis A. and Antonio M. Duarte. “A Scenario-Based Approach to Active Asset Allocation.” Journal of Portfolio Management. 23, 2 (1997): 74–85. Musumeci, James and Joseph Musumeci. “A Dynamic Programming Approach to Multi-Period Allocation.” Journal of Financial Services Research. 15, 1 (1999): 5–21. Naylor, Thomas H., J. L. Balintfy, D. S. Burdick and K. Chu. Computer Simulation Techniques. New York: Wiley, 1968, pp. 97–99. Reichenstein, William. “Savings Vehicles and the Taxation of Individual Investors.” Journal of Private Portfolio Management. (Winter 1999): 15–26. Reichenstein, William. (2000a). “After-tax Wealth and Returns Across Savings Vehicles.” Journal of Private Portfolio Management. (Spring 2000): 9–19. Reichenstein, William. (2000b). “Frequently Asked Questions Related to Savings Vehicles.” Journal of Private Portfolio Management. (Summer 2000): 66–81.

Thanks Darien, that looks like the paper I saw at SQA and mentioned earlier in the thread. I think the key issue was that the Brinson Beebower study looked only at cross sectional returns, whereas the Ibbotson and Kaplan study looked at the effects longitudinally. I guess one interpretation is that stock selection can be timed better than entire asset classes.

virginCFAHooker is quite the seller on global macro… In my experience, the longer people do the “bottoms-up” CFA stuff the more they want to be global macro traders. Can’t beat the liquiidty and scalability. I’ve presented global macro strategies to people and when they ask about how scalable it is, any answer less than about $5B displeases them. Try that with some bottoms-up equity trading (or perhaps you think that you can decide whether Exxon/Mobil will significantly outperform Texaco). Besides global macro trading is an easy way to take advantage of lots of market inefficiencies that just stare you in the face. Why did the Japanese carry trade work? (BTW - privatizing postal savings is not good for the carry trade). There are all sorts of uneconomic players in global macro markets, e.g., central banks, currency hedgers, synthetic position creators, etc… As for it not being CFA stuff - some of the most important aspects of global macro trading is risk and portfolio management as well as macroeconomics - all of which are part of the curriculum.

I have created a private yahoo group to discuss various global macro themes and strategies. Please email me if interested (see my email in first post). I am only looking for people who will make positive contributions to the group. Thanks