Key Points

  • Ample high-quality research has identified three key factors operating in the global macro context—carry, momentum, and value—that can be employed in systematic global investment strategies as a diversifying alternative source of investment returns.
  • A portfolio of 12 individual strategies using stocks, bonds, currencies, and commodities delivers a package of carry, momentum, and value that generates strong absolute returns at moderate levels of risk and leverage.
  • Global macro offers the average investor an opportunity—once enjoyed by only the most sophisticated hedge funds—to benefit from alternative sources of return.

A quarter-century before Brexit came “Black Wednesday.” On Wednesday evening, September 16, 1992, the British government announced its exit from the European Exchange Rate Mechanism, prompting a dramatic devaluation of the British pound. Renowned hedge fund manager George Soros’ legendary bet against the pound in 1992 and his $1 billion profit on Black Wednesday defines for many the swashbuckling style of a global macro trader. Global macro has since become a well-established discipline, and for good reason. Handsome returns can be generated from strategies that profit from the predictable relationships between macroeconomics, politics, and monetary policy.

While forecasting market reactions to idiosyncratic macro events may seem a black art or a fool’s errand, our study of capital markets reveals recognizable patterns and the possibility of consistently profitable trading strategies. Ample high-quality research has identified three key factors operating within the global macro context: carry, momentum, and value. Today we may choose from a growing category of strategies that employ these factors to deliver alternative return premiums. These systematic global investment strategies may provide an attractive and diversifying alternative source of investment returns to the low yields and low returns offered by mainstream stocks and bonds.

From Asset Classes to Factors
The investment industry has evolved since the early 1990s, when Soros infamously battled central bankers. Global macro managers still rely on economic and political events to generate the conditions that present attractive trades across the capital markets—equities, fixed income, currencies, and commodities—but in today’s world, the strategies we use to spot attractive investment opportunities have become more systematic. The rise of machines has improved our ability to process information and identify from large datasets the patterns that can turn opportunity into profit.

Systematic strategies employ quantitative models to determine trading decisions. Models are specified upfront and (ideally) change infrequently. Indeed, if managers frequently manipulate their model parameters to generate the trades indicated by their gut, then the process remains qualitative. Beyond relying on objective evidence, systematic approaches isolate trades from the psychological biases, internal politics, and other personal and organizational stresses that too often interfere with executing sound investment strategy.

As a result, an increasing number of funds have migrated from discretionary human pattern recognition to systematic models. These quantitative strategies using modern financial technology may allow investors access to profit from global macro opportunities with much greater transparency and lower cost than the typical global macro hedge fund. At the core of systematic macro strategies lie few, if any, secret ingredients: the strategies invest across markets by relying on signals that measure well-documented return factors.1