Monday, September 12, 2016

Global macro investing - A simple framework

What separates global macro investing from other hedge fund styles? This style is significantly different from others because it has a broad focus on a wide range of asset classes. It is not just equity or fixed income focused. Its search for opportunities goes beyond any single country. 

If you conduct a factor analysis, the risk exposures will dynamically adjust between equity, fixed income, currencies, and commodities based on the changes in opportunities, trends, and valuation. The value-added occurs through the dynamic adjustment of these exposures. Nevertheless, this factor breakdown does not address how managers make their decisions relative to a traditional hedge und manager who may be focused on picking stocks. 

We offer a simple high level explanation for global macro investing based on classic present value discounting calculations. The global macro investor discounts cash flows like other investors but focuses on macro events which will affect the price of securities. In this framework, global macro managers will forecast how macro events will affect the cash flows through changes in, for example, economic growth. Higher growth rates should positively impact the level of cash flows. Similarly, global macro factors will affect the discount rate. Changes in monetary policy that impact rates will pass through to security prices by affecting the discount rate. From tracking and forecasting macro variables, managers judge the impact on prices through either through changes in cash flows or the discount rate.

The global macro managers at a high level try and address three questions, or focus on three key issues.
  • What is the direction or speed of economy growth? The focus on growth is both globally and country specific. Changes in growth impact cash flows and the response of policy and rates. 
  • What are market liquidity and credit conditions across the globe and within countries? Credit and liquidity will drive discount rates which will impact valuation.
  • What is the appetite for risk by investors? If there is a change in risk appetite or sentiment, there will be a change in cash flow discounting. Uncertainty and the market's response to this lack of clarity concerning future cash flows will impact valuations. 

Global macro investing can focus on just macro issues or be more specialized by looking for specific security opportunities, but it starts with determining the impact of macro events on cash flows and discount rates. This macro focus is through three major channels, economic growth, market liquidity, and risk appetite. This framework can set the table for discussion on specific differences between managers and help focus in their specific investment edge.

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