Everything in the world’s economy is interlinked to a certain degree. When a company in China builds a new chipset they take a portion of the global market cap from a Canadian company. Savvy firms and investors can open positions to play the spread that emerges between the winners and losers of global macro.
Out of all the investment strategies that investment firms, professional investors, and family offices employ one of the hardest is global macro. One of the best books to read on investment strategy is Greg Gilner’s Global Macro Trading: Profiting in a New World Economy.
The reason Global Macro is so difficult to perform is because analysts will have to project an entire sector months to years ahead to illuminate possible alpha generation. While this can net investors massive returns with limited risk, setting up a position correctly is extremely difficult.
This article aims to help change that. I go over 5 tricks of the trade so that you can also employ the global macro investment strategy in your portfolio. Once you learn the steps it becomes easier to replicate. To this day global macro remains my favorite investment methodology/strategy because of its controllable high net return.
Simply put, the 5 tricks to performing global macro successfully are the following.
- Expect investment timelines of 6 months to 3 years.
- Hedge at least 5% of the position
- Forward project global variables surrounding your positions
- Look and watch for global destabilization events
- Spread an investment out by building an index around the Global Macro thesis
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Before we discuss the tricks to profiting from the global macro investment strategy we must first discuss what the global macro strategy is. If you already know then feel free to skip ahead to the tricks section.
What is Global Macro
The global macro investment strategy is where investors bet on global or national events impacting sections of the world’s economy. Normally this investment strategy involves analysts predicting future interest rates, political changes, industry/sector changes, and many other ‘large scale’ events.
How does this work though? Well first an analyst must figure out what a sector or investment is currently doing. A prime example of this would be the crude oil sector.
Let’s look at an example of the global macro strategy that anyone can perform.
Example of Global Macro Investment Strategy At Work
One of the easiest global macro positions to replicate is Brent Crude Oil vs. West Texas Intermediate.
Right now the western world is supplied by two types of crude oil. Brent Crude and West Texas Intermediate. First, Brent Crude comes from the North Sea between England/Scotland and Norway. Brent is so widespread that it sets the price standard for oil barrel prices in the Atlantic Basin. Brent is transported by ocean tankers to markets around the world.
The main competitor to Brent is West Texas Intermediate (WTI). WTI is Pumped from landlocked North America and transported via trucks and pipelines across the United States. Like Brent, WTI also sets prices for international oil futures contracts.
Why does this matter to a global macro perspective though? It’s simple.
Brent is transported via ship tankers through international waters. WTI on the other hand is pumped across North America. This means that if there is significant international turmoil that could impact shipping lanes then Brent will become more expensive. Since Brent will increase in price to assure safe delivery then more people will buy the cheaper option of WTI.
If you see global turmoil coming you can take a long position in WTI and a short position in Brent Crude. If you’re right then your global macro investment in the oil industry will pay you in two ways.
- Brent goes down in price. Your short position makes money
- WTI goes up. Your long position makes money
Once this happens you can then close the positions and inverse it as the world stabilizes again. Prices will return back to normal and you can double the position.
Now let’s look at the 5 tricks to profit from global macro.
5 Tricks To Profiting From Global Macro
Most investors using global macro for the first time get lost in the weeds of trying to perfect a position. This often overcomplicates things and results in more risk then should be in the position.
Here are 5 tricks that will make sure you generate above normal returns while also managing risk while using the global macro strategy.
Trick 1: Expect An Investment Timeline of 6 Months To 3 Years
If you’re looking to make a return in under 6 months then you are looking at the wrong investment strategy.
global macro needs at least 6 months before you see any type of return on your position. For the first couple months you might even see a negative return.
The reason for this is because it takes a lot of time for all of the variables that would impact your investment to start working properly to generate a return.
Therefore if it has been less than 6 months since you opened the position then don’t worry. It is still far too early to tell if your position is going to succeed.
6 months is the earliest. However often a good global macro investment will take between 1-3 years depending on the size of the position. For example George Soros had a position on shorting the pound sterling in 1992 for close to 1 year before the UK withdrew from the EU exchange. As a result his fund made over $1 billion dollars.
Much like Rome, a good global macro position was not built in a day. Its going to take at least 6 months to see anything. More often than not however it will take 1-3 years.
Trick 2: Hedge At Least 5% Of The Portfolio
Nobody is perfect. In order to be successful in investing you need to surround your positions and portfolio with a defense hedge.
Hedging is simply just taking out an inverse position where if your main position fails then you will still make money. It takes time to learn how to do it properly and in many ways is an artform. However, once you know what you’re doing you will become a master at generating risk adjusted returns in the market.
If you’re interested I wrote up an entire article on the 3 easy ways to hedge a position. You can find it by clicking here.
Now when you’re building a global macro position you should hedge at least 5% of the portfolio. This means that you are automatically expecting to lose between 2.5-5% of your initial capital. You are sacrificing this capital to secure your downside and protect the remaining 95%.
Depending on what global trend you are investing in you simply need to inverse the position. Ask yourself what will gain in value if my investment fails? Chances are that will be a decent enough hedge.
No hedge is perfect. If your main position fails by 100% you might only be able to capture 50-60% of the downside with a hedge. However this is better than nothing. The better you get at hedging the more downside you can protect and capture. This is why people pay professionals to manage their capital; “Risk Adjusted Returns” is the key phrase firms will use to entice new clients.
If you’re building a global macro position then you should take time to hedge it. The industry recommends no more than a 5% hedge. This hedge along with some active management of your asset will allow you to drastically lower your total risk in an investment.
Trick 3: Forward Project Global Variables Your Positions
This is the secret of getting a good global macro position. However you would be surprised how many analysts fail to forward project global variables that might impact their position.
This is often a result of analysts getting lost in the paperwork and failing to stand back and look at their clients position.
When you build out a global macro position you should be looking at global variables that will impact your investment. This is often things such as tax rates, retail sentiment, environmental impacts, upcoming legal cases, national turmoil, conflict, or societal tensions.
For example, if South Africa begins to institute a higher tax for tanker ships crossing the cape then this will impact everyone’s bottom line who must ship their product from the west to the east. Further, more shipping traffic will go through the Suez Canal.
Or, if a ship happens to get stuck in the Suez Canal it could shut down the global economy. This happened in early 2021 with the shipping container ship the Ever given, and it resulted in the worlds economy slowing down.
As you could imagine this impacted global macro positions. Further, I know of some funds who made a killing off this event. While the market was collapsing they bought up shares of e-commerce sites which exploded once the ship was freed from the canal.
Trick 4: Look And Watch For Global Destabilization Events
It’s not enough to just build a global macro position to expect global events. Things have a way of going wrong at the worst possible time.
Once you build out the position you need to keep a vigilant eye on everything going on in the investment sphere of influence.
A global macro sphere of influence are the things you identify that can impact your position both negatively and positively. You will never be able to predict all of them. However you can respond to what does impact the portfolio.
A global macro position takes constant attention. You can’t just let it generate capital passively. This will result in a growth in total risk in your portfolio and ultimately could lead to you losing your initial capital investment.
When I am managing a global macro investment I will look out for national destabilization events. This can be things such as a growing inflation or an upcoming conflict that could impact the position.
One of the main tricks of global macro is to constantly be doing this. You need to watch out and rebalance a position along with its hedge so that while your position slowly grows in capital you are also lowering the total risk in the position.
The big firms will spend millions on teams of trained researchers who do nothing but weigh risk in a position constantly. They only get a fraction better risk management then something a trained individual could do however.
Because of this one of the main tricks of global macro is to practice this form of advanced risk management. While it takes a bit of time to learn once you nail it down you are good to go.
Trick 5: Spread An Investment Out By Building An Index Around The Global Macro Thesis
Here is one of the best tricks you can do. Instead of investing in one stock or asset you should find a solid investment thesis that can connect several investments together.
In order to do this you first need to identify what will change in your global macro position by forecasting out global variables. Once you are done with that, start to think about what stocks would benefit from this trend.
Congratulations with this thesis you can then start to build out an index built around global macro investment. The next step is to spread the portfolio across these investments that track the global macro thesis.
When done properly you will capture a majority of the upwards momentum while also drastically lowering your risk. The reason this works is because instead of you investing your capital in one or two stocks you can spread it all out across several companies who will all rise in price because of a global macro trend.
In a way you are building an ETF that seeks to track an index that you built around your observations of where the world’s market will be in a couple years. On top of this you are placing more importance on stocks that you think will best capture this growth.
For example, instead of you buying two electric car manufacturers in China to capture EV growth in Asia. You might buy 2 in China, 2 in Japan, 2 in India, and 2 in South Korea.
As a result you are spreading out your risk across several assets. With active management and hedging you are drastically cutting down on your total risk.
There you have it; 5 tricks to profit from the Global Macro investment strategy. People fail to utilize this investment strategy because they don’t exactly know what they are doing. Fortunately this article aims to clear up a lot of the confusion out there.
If you’re still stuck feel free to reach out to me on Twitter. I am always available to help.
Here at Chronohistoria I aim to publish the best investment articles on the internet. I routinely publish articles going over investment research, methodologies/strategies, and tips/tricks of the trade so that you are better prepared to profit in today’s crazy market.
Feel free to sign up for the free newsletter to remain up to date on all things investing.
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