Last month, we examined some of the characteristic differences between global macro (GM) and managed futures programs offered by commodities trading advisors (CTAs): two directional-biased hedge fund strategies largely dependent on market trends for their returns (for a look at CTAs themselves, see page 82).
The discretionary nature of the global macro approach is evident in that GM managers generally take positions in anti-cipation of a trend. GM traders also tend to exit these positions prior to the trend's tailing off. Conversely, CTA traders take positions in response to price trends that are established, and tend to exit only after the trend has played itself out. Mark Szycher of Weston Capital sums it up nicely: "Macro managers get to the big party early and go home early. CTAs get to the party late, party hard, and go home late."
This different approach toward exploiting the same market movements results in considerable differences in the long- and short-term performance of the two strategies. A comparison (see chart at right) of the 10-year performance data of HFR's Global Macro Index against the Barclay's CTA Index shows that GM managers have exceeded the returns of their CTA counterparts by more than 50% annually over the past 10 years while exhibiting 10% less volatility and, therefore, more than twice the return per unit of risk.
Clearly, the willingness of the GM trader to exit a trend before its technical reversal contributes to the strategy's lower standard deviation and implied dependency on directionality. Unlike CTAs, it is not uncharacteristic of GM traders to sit out a trend where there is too much macro uncertainty or when fundamentals or the trader's market view conflicts with quantitative signals. Moreover, Global Macro is frequently implemented via non-directional relative value trading strategies, and often with a value bias.
The two strategies may play distinctively different roles in portfolios, since both the GM approach and CTAs exhibit unique risk and return characteristics yet are both effective diversifiers that render portfolios more efficient.
Researchers Warsager, Duncan, and Wilkens summed it up nicely in their June 2004 AIMA Journal article that compared GM and CTAs:
"CTAs can be used offensively, by those seeking high returns, or defensively, to obtain a long option-like risk profile (a.k.a. 'long volatility'). Macro managers, as discretionary traders, may or may not be positioned to exploit endogenous volatility and in fact may be short volatility in the form of relative value positions...[or] these managers may be flat (unlike most CTAs) if they have anticipated market turmoil, thus avoiding exposure in a potentially dangerous environment."
Consequently, the attractive risk-adjusted returns and low correlation of GM relative to CTA strategies and the long equities market suggest that Global Macro offers a potentially important role as both a diversifying and risk-enhancing portfolio allocation.--Jeff Joseph
Jeff Joseph is managing director of Rydex Capital Partners and serves on the advisory board of HedgeWorld (www.hedgeworld.com), a global provider of hedge fund information and investment products.
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