Friday, August 12, 2016

Weltanschauug and global macro - financial connectedness

What separates global macro from other hedge fund styles. It could be its wide ranging diversification  across all asset classes or it could be something broader on how opportunities are found. The difference that makes global macro unique from others is what can be described in the German word, weltanschauug. Some would say that you could just use the words world view, but we think it is something deeper with how macro managers connect with opportunities. It is the philosophy that they bring to the market. 

This world investment philosophy has four parts:
  • Financial markets are all connected. Asset classes should not be looked at isolation.
  • Common factors (shocks) or risk premiums affect all markets, just differently.
  • This connectivity is not perfect or immediate. Relative asset reaction is sometimes slow.
  • There is room or opportunity to exploit the divergences and then convergence to equilibrium 
The global macro manager thinks of the investment world as a whole. It is a general equilibrium view and not partial or localized to one asset class. Events in one market will spill-over to others, yet the cascade from one shock will have different speeds of adjustment.

For example, falling oil prices will affect energy companies and will impact energy high yield bonds and the growth of oil importing and exporting companies. The are a host impacts which that have to work through the financial markets. One shock can affect many markets, but the impact or the realization of the potential impact will not happen all at the same time or with the same intensity. 

Markets can be out of equilibrium for reasons as simple as costs and liquidity or through behavior biases. Nevertheless, dislocations allow for opportunities for those who can better understand the linkages. There will be dislocations that will eventually need to be corrected. It is not that markets are inefficient, but rather there is some slack in the level of efficiency that may allow some to profit.

Some like managed futures managers may find these connections and dislocations through trends in prices. Others can see them through comparison to past fundamentals. Still others may be able to tell complex stories and see linkages through detailed analysis. These are all variation of the core world view or weltanschauug that there is cross market connectedness that cane exploited. 

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