Macro Funds
This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains marco funds which is a type of hedge fund based on the analysis of macroeconomic or political events.
Introduction
Macro funds, also known as global macro funds, are actively managed alternative investment vehicles (hedge funds) whose strategy profits from the broad market movements caused by macroeconomic (economic, fiscal and monetary) or geopolitical events. These funds typically invest in asset classes including equity, fixed income, currencies, and commodities. They invest in both the spot and derivatives markets. They use a mix of long and short positions in these asset classes to implement their market views to achieve superior returns (higher than a given benchmark).
Some key elements impacting the decisions taken by macro funds include:
- Economic factors – Macro funds constantly monitor the economic data across different countries including interest rates, inflation rates, GDP growth, unemployment rates and industrial/retail growth rates to make investment decisions.
- Mispricing – Macro funds try to arbitrage markets based on perceived mispricing.
- Political situations – The political situations in different countries also play a major role in the investment decisions made by macro funds as unstable political situations can lead to low investor confidence and thus cause a decline in the financial markets.
Benefits of a macro funds
Like other types of hedge funds, macro funds aim at providing their clients (investors) with investments managed in an efficient manner to optimize expected returns and risk. Such funds are especially expected to diversify the clients’ portfolios. So, macro funds are often acknowledged as the alternative funds in the industry.
Other characteristics of macro funds
Other characteristics of macro funds (clients, fee structure, investment constraints) are similar to other types of hedge funds (see the posts Introduction to Hedge Funds and Hedge Funds).
Examples of macro funds strategies
A commonly used asset class in macro fund strategy includes currencies. Their exchange rates are affected by several factors including monetary and fiscal policies, economic factors like GDP growth and inflation and geopolitical situation. Black Wednesday is an example of an infamous event, where we can understand the different factors and use of macro fund strategies.
Black Wednesday
During the 1970s, an European Exchange Rate Mechanism (ERM) was set up to reduce exchange rate variability and stabilize the monetary policies across the continent. Also, a stage was being set to introduce a unified common currency named Euro. The United Kingdom joined ERM in 1990 due to political instability in the country raising fears of higher currency fluctuations.
The pound sterling shadowed the German mark but owing to challenges faced by Britain at that point in time, including lower interest rates, higher inflation rates and an unstable economy, the currency traders weren’t satisfied with the decision.
Seeing the economic situation, George Soros, one of the most famous investors, used the macro fund strategy during 1992 when he took a short position in the pound sterling for $10 billion and made a $1 billion profit from his position.
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▶ Akshit GUPTA Portrait of George Soros: A famous investor
Useful resources
Academic resources
Pedersen, L. H., 2015. Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. Princeton University Press, Chapter 11, Global macro Investing.
Business resources
DeChesare Brian “Global Macro Hedge Funds: Living in an FX Traders’ Paradise?”
About the author
Article written in August 2022 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).