Global-MacroMedium

3 min read · 536 words

What the seat actually does

A macro fund takes views on economies and policy — where rates are going, what a currency is worth, whether a central bank will move before the market expects — and expresses them in whatever instrument makes the cleanest bet.

The expression matters as much as the view. "Rates will rise" is not a trade. Trading it through short bond futures, a payer swaption, a steepener, or short a currency against another are four different positions with four different ways of being right about the economy and losing money anyway.

• Discretionary — a human decides, from a reading of policy, data and positioning.
• Systematic macro — a rule decides, from the same inputs processed the same way every time.
• Most of the seat's leverage comes from instruments that embed it — futures, swaps and options — rather than from borrowing.

A day, and where it goes

• The calendar — releases, meetings, auctions. Every asset class page on this site has a calendar section for exactly this reason.
• The reaction — not what the number was, but what it was against expectations, and whether the market moved the way it should have.
• Positioning — who else is in the trade, because a consensus position moves differently from a lonely one.
• Risk — scenario by scenario, since a macro book's exposures do not add up in any simple way.

What it is measured on

• Absolute return, and whether it arrived when other things were falling — which is much of what the allocation is for.
• Correlation to equities, especially in bad months.
• Hit rate against average win size. Many macro books are wrong more often than right and make money because the winners are larger.
• Whether risk was cut on the way down, which is the discipline that separates a strategy from a story.

What it touches on this site

• What it trades — rates derivatives, FX, FX derivatives and commodities.
• What it is reading — monetary policy, the yield curve and a central bank statement.
• What the price already contains — what the yield is telling you.
• When a policy trade breaks — 2015.

How it goes wrong

• Right about the economy, wrong about the instrument. The view plays out and the chosen expression does not pay.
• A peg that holds until it does not. Carry that looks free for years is being paid for something, and 2015 is what the bill looks like.
• Leverage sized on recent volatility, which is lowest just before it is not.
• The consensus trade. Everybody positioned the same way means the exit is one door.

Concepts to master

• The market prices a path, not a level. Being right that rates rise loses money if they rise by less than was already priced.
• Carry is the cost of waiting, and it decides how long a position can be wrong before it has to be closed.
• Convexity beats direction in tail trades — an option pays for being right about the size of a move, not only its sign.
• Real rates, not nominal. Most macro arguments dissolve once the inflation component is separated. See inflation.