Global Macro Trading Explained

A global macro trading strategy is an approach used by hedge funds, focusing on the macroeconomic perspective. There are many investment vehicles for global macro investing; typically, funds invest in stock indexes, bonds and derivatives, such as futures.

Generally speaking, hedge funds are able to trade more aggressively than mutual funds and are marketed based on their performance and accessibility to a wide range of investment vehicles. Because of the popularity and growth of hedge funds and the global macro trading strategy, there has been a lot of attention on valuable research initiatives for good investments and new strategies. The most notable global macro strategy is going long or short a particular market, such as one of the five major currencies or one of the three major stock indexes. Note that funds that use the global macro strategy carry a great deal of risk because they are usually net long or net short with a great deal of exposure.

To better understand how this investing strategy works from the perspective of a hedge fund, we can first discuss the major contrasting investment approach that fund companies use to reach their investment goals and objectives.

Top-Down Investing

A top-down approach is the category that global macro falls into. Top-down investing means that the research first starts from the highest reasonable cause factors for the investment that is being pursued. For instance, if the hedge fund has a European global macro fund, they will research the economy, the political landscape of Europe and maybe some of the industries or sub-sectors, depending on their objectives.

Top-down investing means that the research will first focus on the economy or whatever is the principle driver for the particular market that is being pursued. After the pinnacle driver is researched, the company will research each subsequent level of cause factors driving the market of interest.

Bottom-Up Investing

A bottom-up approach is the opposite of the top-down approach because it focuses on the market or investment at hand without first researching the market or economy at large. For example, investment funds that care to pick stocks are considered bottom-up investors. Even if the economy may not be in the best shape, stock pickers believe that the fundamentals of their investments will prevail.

For your information, the alternative investments industry offers many more new options to investors. Traditionally, hedge funds have been known to be opaque in their explanations, offering no transparency to clients, and they certainly are not obliged to show the results of a proper audit of their performance, their organization or their trading strategy. Their focus has been mostly on end results, performance. A lot of what has happened in the industry has been in the way of collaboration between hedge funds and mutual funds, if you will. Managed futures and certain mutual funds offer performance-driven portfolios as well as complete transparency thanks in large part to the regulation of their industry. Hedge funds, historically, have been completely unregulated.

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