When Macro Lost Its Way
by Stephen Duneier
As I prepared to launch my own hedge fund, I met with the head of a large fund-of-funds for guidance. The question I was grappling with was whether we should call ourselves a macro fund. After all, I’m not a momentum trader, I often don’t have an opinion on the Euro or the Dollar, my positions are rarely one dimensional, and I actually do well in low vol environments. It’s why my correlation to the macro indexes is nearly zero for 12 years now.
If I’m not macro though, what am I? I express my views almost exclusively through options, but I’m not a vol trader. Emerging markets often represent a large proportion of my positions, but I’m not a carry trader. In fact, my correlation to the indexes of just about everything that characterizes my portfolio, is also close to zero. “The answer is simple”, said my fund-of-funds friend. “If you trade macro products, then you’re macro.”
This hasn’t always been the case, though. Back when George Soros took on the Bank of England, he was truly global macro, not because he was using currencies and fixed income products, but because the views he expressed were driven by global macro themes. For the most part, what masquerades as global macro today is really just short-term, momentum currency and/or rates trading. What I would call, global micro. It tends to employ tight stops as a pretense for discipline, VaR typically chases returns, and those returns have suffered.
How Did This Happen?
Early macro hedge funds were incredibly successful, however, few people could actually define what macro meant. Yes, money chased the success, but also its esoteric nature. You can’t charge fees to be long equities or long debt, but you can charge for mystery and potential. Even allocators will often readily admit they don’t quite understand macro, so they either avoid it or opt to outsource to consultants, many of whom have perpetuated the shift from global macro to the watered down version.
Unfortunately, macro is nearly dead. There are very few old-school macro fund managers left, and more often than not, those that do exist are simply investing their own money, because the demand for consistent, short term returns with low volatility is not conducive to truly global macro investing.
Global macro is chunky. It is early and explosive. It sees what others cannot, or will not. It gets the difference between a scene, an act and a play. More than anything, global macro understands the context within which data is released and policy decisions are made. It has its own opinion on that policy, understands its implications and how to capitalize on them.
Ultimately, I chose to define myself as global macro, not because of the instruments I employ, but because my positions are driven by the broadest global macroeconomic themes, and I’m not embarrassed to admit it. Often, when I present my views, it evokes the response, “Fascinating, but how do you trade it?”, to which I can’t help but respond, “How do you trade without it?”
The truth is, macro trading is fundamentally all about momentum, but the kind of momentum that is far more powerful, and the results of which, are far more predictable than the global micro kind. However, they often take time to play out and it’s that time frame that seems to trip many up and turn some people off, particularly these days. That, I believe, is how global macro lost its way. It allowed itself to be transformed into just another short-term, myopic investment style, interchangeable with any of the others. However, its drivers are not like those of all the others, and therein lies the problem.
How Do You Trade It?
To be honest, I struggle to comprehend how it is that one can trade markets like oil, grains, emerging markets and even US Treasuries without giving great consideration to things like the orchestrated urbanization of the most populated country in the world, representing a shift in global demographics of historic proportions, whose impact will be felt both today, and for generations to come. While global macroeconomic trends are longer term, they are also more certain. When short-term cycles run counter to the long-term waves, it creates opportunity, but only if you truly grasp the context in which those cycles are occurring. Otherwise, you risk getting caught up in the minutiae and hyperbole of the short-term phenomenon.
For example, it was the global macro context that drove me to go long Brazilian Real when Lula was first elected and the currency was collapsing in value. It is why I saw the jump in steel exports from Japan to China in 2004 as the death knell for Japanese manufacturing. It allowed me to recognize the brief window of opportunity when tropical emerging markets could become wealthy for the first time in history. In the summer of 2012, that context gave me the confidence to sell corn at the all-time highs, when markets were focused on the hysteria that comes with a “50 year drought”. It’s why oil trading at $115 per barrel attracted my attention, and I remain bullish equities.
What’s truly amazing is that the period in which some of the most powerful global macro trends have played out, has seen some of the worst results from the trend following “global macro” community. I will admit, the pressure to become global micro is difficult to resist, even for the most ardent of macro types among us. As a start-up hedge fund, it’s nearly impossible these days.
Since I began writing as Bija Advisors, I’ve been bombarded with advice on how to “sell it” and once again, I find myself being sucked in, but here, I can resist. What I produce is intended to provide the global macro context necessary for deciphering the implications of policy action, commodity prices, unemployment data, volatility and all the other global micro factors. Yes, context takes time and patience to develop, but the payoff can be both more certain and explosive. Two things global micro is sorely lacking.
If I’m not macro though, what am I? I express my views almost exclusively through options, but I’m not a vol trader. Emerging markets often represent a large proportion of my positions, but I’m not a carry trader. In fact, my correlation to the indexes of just about everything that characterizes my portfolio, is also close to zero. “The answer is simple”, said my fund-of-funds friend. “If you trade macro products, then you’re macro.”
This hasn’t always been the case, though. Back when George Soros took on the Bank of England, he was truly global macro, not because he was using currencies and fixed income products, but because the views he expressed were driven by global macro themes. For the most part, what masquerades as global macro today is really just short-term, momentum currency and/or rates trading. What I would call, global micro. It tends to employ tight stops as a pretense for discipline, VaR typically chases returns, and those returns have suffered.
How Did This Happen?
Early macro hedge funds were incredibly successful, however, few people could actually define what macro meant. Yes, money chased the success, but also its esoteric nature. You can’t charge fees to be long equities or long debt, but you can charge for mystery and potential. Even allocators will often readily admit they don’t quite understand macro, so they either avoid it or opt to outsource to consultants, many of whom have perpetuated the shift from global macro to the watered down version.
Unfortunately, macro is nearly dead. There are very few old-school macro fund managers left, and more often than not, those that do exist are simply investing their own money, because the demand for consistent, short term returns with low volatility is not conducive to truly global macro investing.
Global macro is chunky. It is early and explosive. It sees what others cannot, or will not. It gets the difference between a scene, an act and a play. More than anything, global macro understands the context within which data is released and policy decisions are made. It has its own opinion on that policy, understands its implications and how to capitalize on them.
Ultimately, I chose to define myself as global macro, not because of the instruments I employ, but because my positions are driven by the broadest global macroeconomic themes, and I’m not embarrassed to admit it. Often, when I present my views, it evokes the response, “Fascinating, but how do you trade it?”, to which I can’t help but respond, “How do you trade without it?”
The truth is, macro trading is fundamentally all about momentum, but the kind of momentum that is far more powerful, and the results of which, are far more predictable than the global micro kind. However, they often take time to play out and it’s that time frame that seems to trip many up and turn some people off, particularly these days. That, I believe, is how global macro lost its way. It allowed itself to be transformed into just another short-term, myopic investment style, interchangeable with any of the others. However, its drivers are not like those of all the others, and therein lies the problem.
How Do You Trade It?
To be honest, I struggle to comprehend how it is that one can trade markets like oil, grains, emerging markets and even US Treasuries without giving great consideration to things like the orchestrated urbanization of the most populated country in the world, representing a shift in global demographics of historic proportions, whose impact will be felt both today, and for generations to come. While global macroeconomic trends are longer term, they are also more certain. When short-term cycles run counter to the long-term waves, it creates opportunity, but only if you truly grasp the context in which those cycles are occurring. Otherwise, you risk getting caught up in the minutiae and hyperbole of the short-term phenomenon.
For example, it was the global macro context that drove me to go long Brazilian Real when Lula was first elected and the currency was collapsing in value. It is why I saw the jump in steel exports from Japan to China in 2004 as the death knell for Japanese manufacturing. It allowed me to recognize the brief window of opportunity when tropical emerging markets could become wealthy for the first time in history. In the summer of 2012, that context gave me the confidence to sell corn at the all-time highs, when markets were focused on the hysteria that comes with a “50 year drought”. It’s why oil trading at $115 per barrel attracted my attention, and I remain bullish equities.
What’s truly amazing is that the period in which some of the most powerful global macro trends have played out, has seen some of the worst results from the trend following “global macro” community. I will admit, the pressure to become global micro is difficult to resist, even for the most ardent of macro types among us. As a start-up hedge fund, it’s nearly impossible these days.
Since I began writing as Bija Advisors, I’ve been bombarded with advice on how to “sell it” and once again, I find myself being sucked in, but here, I can resist. What I produce is intended to provide the global macro context necessary for deciphering the implications of policy action, commodity prices, unemployment data, volatility and all the other global micro factors. Yes, context takes time and patience to develop, but the payoff can be both more certain and explosive. Two things global micro is sorely lacking.
About the Author
For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis and Behavioral Investing in the College of Engineering at the University of California.
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management.
As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
Bija Advisors LLC
In publishing research, Bija Advisors LLC is not soliciting any action based upon it. Bija Advisors LLC’s publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Bija Advisors LLC does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Bija Advisors LLC’s publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither Bija Advisors LLC nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, Bija Advisors LLC and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. Bija Advisors LLC is not liable for any loss or damage resulting from the use of its product.
For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis and Behavioral Investing in the College of Engineering at the University of California.
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management.
As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
Bija Advisors LLC
In publishing research, Bija Advisors LLC is not soliciting any action based upon it. Bija Advisors LLC’s publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Bija Advisors LLC does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Bija Advisors LLC’s publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither Bija Advisors LLC nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, Bija Advisors LLC and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. Bija Advisors LLC is not liable for any loss or damage resulting from the use of its product.