Welcome to the inaugural post of JRMacroResearch!
In this day and age, the amount of recorded information grows by the split-second. Each minute, on average 149,000+ emails are sent; 340,000+ new tweets are posted; 300+ hours of YouTube content are uploaded. This exponential increase in the amount of new information may hinder the data interpretation process and may ultimately lead to suboptimal decisions.
While day-to-day decisions may not require information to be conveyed, the field of business requires the pitching of data to third parties before making decisions. Actually, empirical studies suggest that the last stage of the learning process is “conscious competence of unconscious competence”. Said in other words, in this step the individual is able to teach given his/her skill has become so practiced that it enters the unconscious parts of the brain. Some examples are driving, sports activities, listening and communicating. In order to get your message across when pitching your data, you must demonstrate clear thinking, something which is only mastered by clear writing.
The aim of JRMacroResearch is to help me achieve the “conscious competence of unconscious competence” by providing a weekly analysis of financial markets, with a particular focus on global macro across different regions and asset classes.
What will JRMacroResearch be about?
As mentioned above, the newsletter will mainly focus on providing markets updates from a macrofinance perspective.
But, what is global macro?
Global macro is the strategy of using economic theory, educated guesses about the macroeconomic environment, and geopolitical events to make large-scale investments worldwide. Factors involved in this strategy are interest rates, politics, domestic and foreign policies, international trade, currency exchange rates, etc.
What strategies does global macro employ?
Global macro can be divided into four basic approaches: Discretionary; Systematic; High frequency; and Commodity Trading Advisors (CTAs).
Discretionary: This approach relies on a trader’s experience, intelligence, and knowledge to take subjective and often risky bets on various global markets in order to capture alpha and the best adjusted return. By taking into account economic data, central bank policies, among other factors, global macro investors can analyze risks and opportunities by industries, sectors, countries and macroeconomic situation at large. For example, when a macro trader believes that French yields will be less affected than Greek yields, he can short Greek 5Y and go long French 5Y.
Systematic: Systematic traders rely on large sets of quantitative data to earn alpha by capturing dislocations. Since strategies are constantly backtested and improved, large asset allocators such as pensions, sovereign wealth funds, and endowments that have large amounts of capital to allocate, find comfort in using a computer-driven process with predictable drawdowns. Over long periods of time (e.g. >=7years) systematic funds can produce more consistent returns than discretionary strategies; however, in periods of high volatility, they tend to underperform discretionary macro, as they did in 2008. Empirical studies demonstrate that while systematic macro is scalable and can take large allocations, it is wise to allocate to both discretionary and systematic macro in a fairly even manner. We can differentiate between two types of systematic strategies:
Trend-following strategy: This strategy attempts to capture price trends with durations ranging between one and six months. A wider range of durations increases both diversification and capacity. The ultimate success of this strategy depends on balancing the profits gained from entering likely trends against the cost of entering trades and against the possible losses when trends do not emerge or reverse against the profits gained.
Relative value strategy: This strategy attempts to create portfolios where each position is dependent on at least some of the other positions in the portfolio. It is worth mentioning that risk management plays a crucial role in this strategy given misspricing may persist or even widen beyond expectations. This strategy leads to many new opportunities that are not available in an individual market-by-market analysis.
High Frequency Trading: This strategy employs highly sophisticated computers and technology to trade millisecond dislocations that may exist in the market. Unlike discretionary and systematic macro, HFT is not as large or scalable. Holding periods can range from milliseconds up to a few hours depending on the strategy. This means, these traders rarely hold their portfolio overnight and accumulate minimal capital, something which leads to a exceptionally high Sharpe Ratio. In high frequency trading, processing speed is of the utmost importance to ensure that certain dislocations are captured.
Commodity Trading Advisors (CTAs): This strategy relies on momentum indicators, namely prive moving average or price channel breakout models. It is worth mentioning that CTAs only trade future contracts traded on exchange, which avoids counterparty risk and, at the same time, offers very high liquidity. Symilar to Systematic macro, the vast majority of CTAs are trend followers. The models employed cover more than 100 markets over different time frames, ranging from seconds to months. As with other trend-following strategies, CTAs perform very well over longer periods of time. Yet, they are subject to large drawdowns (peak-to-trough).
My name is Javier Ramos, a Spanish MSc Finance student at the National University of Singapore (NUS) Business School. For the last three years I have been working as an auditor in the financial services sector. I also have experience in the consulting and biochemical industries.
I usually spend my time reading or doing sport. Along with this, I also like travelling and capturing moments through lens.
Before you leave…
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