Wednesday, February 24, 2016

Global macro opportunity landscape

If you are an allocator to global macro strategies, you have to make some assessments on the relative opportunities across asset classes. Choices have to be made. Someone asked about our view on which sectors have better opportunities, so we developed a simple table of opportunities by sectors. 

In the post 2008 period, there was limited moves in foreign exchange, so even if you picked the best FX manager, you would not have done as well as just holding beta exposure in equities. Being long-biased in commodities was horrible in the post crisis period. Trying to trade short rates would have gained limited money. Fixed income generated gains. 

One of the key determinants of where to put capital to traders is volatility. Not standard deviations but spreads from market moves. Although it may seem counter-intuitive, asset classes that are subject to large moves offer better opportunities for traders. Sectors which have little volatility make it harder to generate gains. There may be better signal to noise in low volatility markets, but the size of the moves may be smaller. Higher volatility offers better potential gains. 

Willy Sutton, the bank robber, wanted to visit banks. Firemen are attracted to fires. Lawyers want have clients that need legal advice. Doctors want to help sick people, and traders want volatility and price moves.

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