Hedge Fund Strategies: Global Macro

The term global macro is used to describe a group of hedge funds that take positions in markets around the world based on big, “macroeconomic” factors such as interest rate movements, currency markets, global stock and bond trends, commodity prices, political changes, government policies, and other very broad systemic factors.

Global macros have been described as the “grizzly bears” of hedge funds: big, powerful and aggressive. They aim to profit from changes in the global economy, sometimes using leverage to accentuate their predictions of market moves.  They can be extremely profitable, but are also quite volatile, and can produce massive losses as well as gains.

Many of the biggest and most famous hedge funds are macro funds. They need to be big because they need a great deal of capital to take positions around the world. Because of their size, macro funds tend to get much of their investment capital from large institutions and the world’s wealthiest investors.

Perhaps the most famous global macro fund is the one run by George Soros. Soros is the founder of Soros Fund Management. In 1970 he co-founded the Quantum Fund with Jim Rogers, which created the bulk of the Soros fortune. On Black Wednesday (September 16, 1992), Soros became famous when he sold short more than $10 billion worth of pounds, profiting from the Bank of England’s reluctance to either raise its interest rates to levels comparable to other EU countries or to float its currency.

Finally, the Bank of England was forced to withdraw the currency from the European Exchange Rate Mechanism and to devalue the pound sterling. Soros earned an estimated US$ 1.1 billion in the process. He was dubbed “the man who broke the Bank of England.”

He did it again in 1997. Soros and other hedge fund managers believed that the currencies of Thailand, Indonesia, Malaysia and the Philippines were overvalued relative to the US dollar and other world currencies. Therefore they shorted huge amounts of the currency (borrowing the currency and selling it, hoping to repay the loan when the borrow currency depreciated).

When it became clear that the currencies were in fact overvalued and that everyone was short, the currencies went into a freefall, (which may have helped precipitate the so-called Asian financial crisis of 1998 . The hedge funds posted huge profits. Former Malaysian Prime Minister Mahathir Mohamad accused George Soros of ruining Malaysia’s economy with “massive currency speculation.”

Thus, global macro hedge funds are the often the ones that political leaders hate, that top traders want to work for, and that make international headlines. They can have an enormous impact on exchange rates, particularly in developing countries.

Next time, we’ll look at what it takes to be a global macro fund manager.

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