Tuesday, March 29, 2016

A wide difference - global macro and managed futures hedge fund styles

Is there a difference between global macro and managed futures hedge fund styles? Many investors lump the two of these strategies together. Clearly, the investor's objective of holding global macro and managed futures are the same. Investors want to get a unique return stream that is uncorrelated with major asset classes. More importantly, investors want that low correlation to come at the right time - the "bad times" for equities. This is the crisis beta that has been written about for managed futures and to a lesser extent global macro. While the expected result for each is supposed to be the same, each strategy will generate returns in avery different fashion. Good global macro managers are able to generate high stand alone returns or alpha. Good managed futures managers are able to provide more diversification at extremes, but at the cost of lower stand alone returns.

We have listed sixteen differences between a managed futures and global macro manager. Now, this breakdown may not apply in all cases, but we believe this is a good first pass for any discussion of the difference between the two hedge fund strategies. We have also broken the difference in a four categories. 

The first category is associated with the use of information. Managed futures will usually be systematic in its decision making while global macro will usually follow a discretionary approach. Discretion can be very disciplined, but it is not usually machine-based. Managed futures will usually be price-based while the global macro manager will use fundamental information and be value-based. The managed futures manager who is price-based will be backward-looking because the focus is normally on the trend. The global macro manager will be forward-looking because he is trying to determine where prices are headed. The managed futures will start from prices and then build a portfolio. The global macro manager is more likely to describe the macro environment through a set of themes and is hence top-down with the expression of trades based on situations and relative value.

There will be a difference in the type of trades that are taken. Managed futures will be model driven while the global macro manager will structure trades across markets or in swaps or options. Managed futures will focus on liquid futures markets while the macro manager is willing to look at credit and less liquid trades in an array of derivatives. Managed futures will generally be more directional in its approach while macro managers are willing to focus on relative value and spreads across markets.

The style of trading will be different. Managed futures will inherently be divergent in its style because it is exploiting trends. The macro trader will be more interested in relative value and mis-pricing and will have a greater focus on convergence trades. The managed futures manager will create positive convexity with the overall exposure of the portfolio. A trend-following is willing to hold market positions longer and cut loses through stop orders. The macro trader will form convexity on a trade basis by setting downside cut-offs or using option to sculpt returns.

The return targets for managed futures is often ambiguous because returns are based on extended directional moves and not specific price targets. The macro manager will think and talk about return to risk ratios and specific return targets on a trade. Risk for the macro manager is trade specific while the  risks for the managed futures manager is  specific to market volatility.

Precise knowledge is gained through categorization. If we can identify the characteristics of a strategy, we can then determine its uniqueness and true value-added.

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