The Return of the Macro Hedge Strategy

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The decade-long macro trading strategy made famous by investors like George Soros and Louis Bacon is making a comeback, with Macro Hedge Funds producing their best year since the global financial crisis last year. They create large bets that are exploited by imbalances in global markets, from debt stocks, currencies, commodities and other assets.

After years of poor returns in markets dominated by central bank stimulus, macro hedge funds have been turbocharged by a sharp cut in interest rates during the pandemic and, subsequently, the return of high inflation and a sharp rise in interest rates as economies opened up.

There has been a paradigm shift in the interest in macro funds from the previous decade to now, largely due to the change in central bank activity.

Macro hedge funds are aggressively hiring experts in the field, as managers prepare for a major influx of capital from investors looking for ways to protect their holdings in an environment of volatile markets and waning support from central banks. Thus, the unspoken structural change in the markets – the widening of interest differentials, quantitative tightening and imbalances in the performance of different economies – creates a range of opportunities for good profits.

One of the oldest hedge fund strategies, the Macro Hedge, has been out of date for years as trillions of dollars in central bank stimulus dampened market volatility and pushed interest rates to near zero, limiting their ability to earn.

But market processes are no longer constrained by central banks and it looks like the Macro Hedge strategy will continue to be the big winner. Higher interest rates correspond to better returns for macro. In a recent study, BNP Paribas found that the Macro Hedge was the best performing strategy last year, and is currently one of the most popular for asset allocation in portfolios.

Investors are particularly focused on the market paradigm shift and what is happening in interest rates and inflation, and Macro Hedge Funds are very well positioned to benefit from the shifting layers.

What is a Macro Hedge?
Macro-hedging is an investment technique used to mitigate or eliminate systemic risk in a portfolio of assets. Macro hedging strategies typically involve the use of derivatives to take short positions on broad market catalysts that may adversely affect the performance of a portfolio or a particular underlying asset.

A standard Macro Hedge usually requires considerable foresight, extensive access to economic data and very good forecasting skills to project the expected reaction of the markets when trends emerge. In some cases, however, macro-hedging positions can be easily predicted, through a series of events leading to a predetermined outcome. Standard Macro Hedge is most often done by experienced investors and professional portfolio managers.

Nowadays, however, investors without broad market access to financial instruments used for macro-hedging strategies can turn to some of the industry’s retail offerings, usually packaged in the form of exchange-traded funds (ETFs).

ETF strategies for macro hedging
Inverse and ultra-inverse /multiplied/ ETF offerings have made macro hedging easier for retail investors confident of a downside outlook for a particular sector or market segment. A good example of such an event is Brexit, which caused short-term losses in many UK stocks and also caused the British pound to deflate.

Many investors anticipating these losses took short positions in UK stocks and the British pound, leading to significant market gains following the Brexit vote and subsequent events leading up to the split.

The return of Forex as the interest rate differential widens
In the current market situation of quantitative tightening, widening interest rate differentials and slowing economies, many opportunities are created for macro hedge trading. The most legendary macro trader – George Soros, made his biggest deal in a similar market situation. Simply put leveraged pounds, betting against them, through positions in the now-defunct currency – Deutsche Marks.

Other macroeconomic events that can drive macro hedging strategies include expectations of a country’s gross domestic product, inflationary trends, as well as various factors affecting commodity prices. ProShares and Direxion are two ETF providers that have developed a wide range of ETF products offered for macro hedging. Inverse bearish products include the ProShares UltraShort FTSE Europe ETF, the ProShares UltraShort Yen ETF and the Direxion Daily Gold Miners Index Bear 3X Shares.