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The impact of macroeconomic conditions on financial markets is not static — it evolves with time. In recent years, we’ve witnessed a regime change, with macro factors influencing investor sentiment to a degree not seen in the past two decades. This might present challenges for asset allocators, as the process of constructing robust portfolios becomes more complex when faced with rising inflation, shifting monetary and fiscal policy, looming recession fears, political divisions, and global tensions. However, it is precisely in such a volatile environment that global macro strategies may find their greatest opportunities to shine.
In this article, we consider the heterogeneity of the global macro strategy universe, the case for combining different styles, and the choice between a single- and a multi-manager approach. We also explore the critical strategic role global macro strategies may play in a diversified investment portfolio, a consideration that may be particularly pertinent in today’s financial climate.
When we asked ChatGPT to define a global macro strategy, we were informed that it is a strategy that “capitalizes on broad economic and political trends. These strategies make investment decisions based on the anticipated impacts of macroeconomic and geopolitical events, such as changes in interest rates, inflation, economic growth, currency exchange rates, and political stability.”
It’s a reasonable definition, but it leaves out a lot of important detail. At a granular level, global macro strategies can vary greatly across multiple dimensions, such as the trading styles, analytical approaches, and strategic frameworks they use and the asset classes and regions in which they invest (Figure 1).
Figure 1
Importantly, the diverse investment styles within the global macro universe can be complementary to each other. For instance, relative value macro strategies are known for producing returns that are not directly tied to broad market movements, which typically results in a higher Sharpe ratio compared to directional strategies. On the other hand, directional strategies, though they may carry higher risk, can potentially generate more substantial returns, especially in markets with clear trends.1 In addition, directional strategies have tended to exhibit positive convexity due to their asymmetric payoff profile, meaning they can potentially benefit from changes in volatility resulting from significant economic and policy shifts.
These complementary attributes are underscored by the minimal correlation observed among various macro investing dimensions. As illustrated in Figure 2, the average cross-correlation among different HFRI Macro indices stands at approximately 0.3. When examining the 266 individual constituents comprising the HFRI Macro Index (those for which data is available), we find the average cross-correlation is notably low, at just about 0.1.2
Figure 2
For investors who want to tap into the multi-dimensional nature of the global macro category, we think the choice between a single-PM and a multi-PM framework is critical. It is akin to selecting between a soloist and a symphony orchestra. While the soloist may be highly accomplished, the orchestra, with its multitude of instruments and harmonious collaboration, can deliver a richer, more nuanced sound. Similarly, a multi-PM approach may bring together diverse strategies, each playing its part in an effort to create a well-balanced and resilient portfolio. We think this approach is better suited to navigating the complexities of the markets and ensuring the various investment dimensions work in harmony to pursue superior risk-adjusted performance at the overall portfolio level. While we understand the allure of high-performing single-PM strategies, we think their narrower focus on an individual strategy may heighten vulnerability to the biases of the portfolio manager and to market volatility.
For illustration, consider a hypothetical multi-PM portfolio whose underlying managers have a cross-correlation of 0.2 (Figure 3). If we assume each underlying manager maintains a Sharpe ratio of 0.5, then expanding the number of managers from one to five would boost the portfolio-level Sharpe ratio by 67%; expanding the number to the high teens would double the Sharpe ratio. Our studies also indicate that beyond a certain threshold, the Sharpe ratio enhancement diminishes, as seen when incorporating 200 portfolio teams in our example, which would not markedly improve the portfolio's Sharpe ratio — likely a consequence of “over-diversification.” It’s worth noting that we believe the success of multi-PM strategies often hinges on proficient portfolio construction methods, including robust risk management, allocation methodologies, and correlation analysis.
Figure 3
Broadly speaking, global macro strategies stand out as a potential diversifying force within the investment landscape, characterized by their lack of correlation to traditional markets. With their inherent flexibility, global macro strategies can potentially prosper in various market conditions, including rising and falling markets (Figure 4).
Figure 4
As highlighted in our mid-year alternatives outlook, the significant levels of divergence, disruption, and dispersion currently impacting the market underscore the importance of effective diversification. While many investors turn to fixed income, gold, and “safe haven” currencies, these assets do not always fulfill their role as diversifiers, with their benefits varying greatly at times. We saw this in 2022, as investors grappled with a simultaneous sell-off in equities and those traditional safe havens. In contrast, global macro strategies distinguished themselves as a clear outperformer (Figure 5).
Figure 5
Looking ahead, we anticipate that the correlations between risk assets and safe-haven assets may continue to be unstable. This vulnerability can be attributed to escalating challenges, such as heightened fiscal deficits, the threat of stagflation, and the ongoing economic decoupling between China and the US. For example, as we discussed in our recent research, the potential rise in government borrowing costs could lead to disruptions in both equity and fixed income markets.
With this backdrop in mind, we think incorporating global macro strategies as a long-term allocation within a diversified investment portfolio may offer substantial advantages. As illustrated in Figure 6, an allocation to global macro strategies can potentially enhance a typical 60/40 portfolio’s risk-adjusted return profile.
Figure 6
Of course, no investment will outperform in every environment. Specifically, history suggests that macro strategies would be expected to deliver more average return outcomes in periods marked by lower volatility and little price differentiation among financial assets — along the lines of what we witnessed in the decade following the global financial crisis.
We believe that global macro strategies offer a compelling opportunity for investors who seek consistent returns and diversification, as well as exposure to the ever-evolving macroeconomic and geopolitical landscape. As discussed, we think the optimal approach to engage with this heterogenous investment universe is through a multi-PM approach that can orchestrate a mix of diverse strategies in pursuit of a well-balanced and resilient portfolio. Over time, global macro strategies may play a critical role in enhancing the risk-adjusted performance of investment portfolios, especially in today's complex and uncertain market environment, where traditional safe havens may not always serve their intended purpose.
1For illustrative purposes only. The actual Sharpe ratio for any given strategy will depend on various factors, including the skill of the investment manager, market conditions, and the specific assets involved. | 2Sources: Wellington Management, HFRI | The average cross-correlation is calculated using historical monthly returns for 266 constituents from January 2017 to December 2023. Only managers with a complete data set for this time period were included in the analysis. While we believe third-party data is reliable, there is no guarantee as to its accuracy.
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