In their youth, global macro funds were primarily one-person shops placing directional bets with a lot of leverage and very few risk controls. Their volatility was extremely high, and large losses were frequent. For example, the Quantum Fund gained $1 billion against the British pound in 1992, but lost $2 billion during the Russian crisis of 1998. However, this old-style school of global macro fund gradually disappeared after the 1990s. Today's global macro managers still enjoy a high degree of flexibility, but risk management and a disciplined investment approach have become essential components of their activities.

The risk management culture has definitely changed the way global macro strategies are implemented. Most modern global macro managers aim to optimally diversify their portfolio holdings in order to reduce and control risk. In doing so, they often use a combination of value-at-risk measures and stop-loss orders. The former quantifies the estimated loss at different levels of probability and time horizons, and has the advantage of being applicable across all asset classes and instruments as well as at the portfolio level. It is used to allocate risk capital across trade ideas and traders. The latter, stop losses, are intended to impose rational and disciplined behavior, forcing a manager to exit from losing trades regardless of conviction. As summarized by Bruce Kovner (the manager of Caxton Associates LP), stop losses ...

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