Is Global Macro Investing Dead?

By now you know I view the world through a relative lens. Meaning, when I’m asked, “What do you think about European stocks?” I can rarely give a straight, simple answer.

“Compared to what?” I’ll ask. And then, “Like ‘em better than emerging market stocks, but they’re underperforming U.S. stocks, particularly small caps.”

Investors always have choices… earn 2.7% on 10-year Treasury bonds, or buy something else. That’s the beauty of the markets. Different investments generate different returns, have different risk profiles, and therefore attract different investors.

One little-talked-about (potential) side effect of central bank easing – particularly when everyone participates – is the homogenization of markets.

If the U.S. and Japan are both stimulating, it’s likely both the U.S. and Japanese stock markets will rise together, in a “rising tide lifts all boats” fashion… regardless of the fundamental differences between the two markets. That’s the theory, at least.

If this happens, “global macro” strategies, where investors bet on the relative performance of different countries or regions around the world, would be dead in the water.

Yet, here’s a telling chart that shows global macro strategies have been on their way out since 2001, long before the global central bank stimulus party began.

The left edge of the chart shows that, in 1995, global macro strategies were widely popular, accounting for more than 60% of all investment strategies used at the time (the dark grey section).

As you move to the right on the chart, you see how that dark grey section shrinks, showing how investment managers began ditching global macro programs, turning to other investment strategies instead.

My hunch is global macro strategies began underperforming as the globalization of economies and markets caused an increase in correlations. Basically, stock markets around the world began to move more in tandem, eliminating many of the profit opportunities for global macro funds.

This shift predates widespread central bank intervention, so we can’t blame stimulus for the homogenization of global markets.

But there’s one more fact on this chart that caught my eye: The green section, which represents multi-strategy and managed futures programs. These weren’t popular before 2003, taking less than a 5% slice of the pie. Today, these strategies have grown their share to nearly 20%.

This is a very interesting trend… and a whole other subject, which I’ll write on in the weeks ahead. Stay tuned.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.