Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Portfolio Characteristics

All global macro funds tend to trade instruments on exchanges or markets where there is anonymity, liquidity, and transparency. This limits most funds to trading in listed futures, options on futures, currencies, and benchmark government bonds. Very few global macro funds trade individual stocks and corporate bonds, although some may do so. Listed futures contracts, currencies, or government bonds can be traded on a directional, fundamental, or technical basis or as part of a systematic rules-based program.

Discretionary global macro funds add value based primarily on the quality of their economic research, the ability to forecast the changes in financial asset or commodity prices associated with changes in economic factors, their willingness to show convictions and place large bets on anticipated outcomes, and their ability to manage risk.

Successful discretionary managers employ experienced economists, have access to government officials and economic policy makers, use both qualitative and quantitative research methods, and are quick to use stop losses to cut losing positions.

Discretionary global macro funds typically manage only 5 to 10 themes at a time in the hope of making large profits on one or two positions, small losses on one or two positions, and existing positions or themes that show little to no directionality.

Top-Down Discretionary or Directional Trading

In a discretionary or directional trade, an instrument is purchased or sold short in ...