Macro trading is a type of trading strategy employed by hedge funds. Hedge funds, which generate returns for investors through betting pooled amounts of their money on both rising and falling prices, are best defined by their investment strategies. A fund manager, also known as a general partner, sets the fund’s strategy with the goal of maximizing returns while eliminating risks and directs various limited partners to invest in accordance with the strategy’s guidelines.

Hedge funds that employ the macro trading strategy invest in instruments whose price fluctuations are determined by changes in economic policies and the flow of capital around the world. Unlike more traditional hedge funds, macro funds have more flexibility in taking broader views of global markets and have the resources to trade aggressively. Macro trading generally focuses on broad-scope instruments that move based on systemic risk. Generally, hedge funds that utilize a global macro strategy focus on three sub-strategies: currency, interest rate, and stock index.

Currency Strategies

This sub-strategy of global macro trading focuses on the strength of one currency relative to another. The fluctuations of this currency pair are based on a number of factors including global monetary and economic policies as well as the difference between one country’s short-term interest rates versus its counter currency. Instruments for this type of sub-macro trading include futures contracts, over the counter spot transactions, options, and forward rates.

Currency pairs of developed countries’ currencies versus the dollar, known as major currency pairs, trade 24 hours per day, six days per week, and are tremendously liquid.

A key feature of currency trading is that the leverage in the market can range to as high as 100-1, meaning that $99 can be borrowed for every $1 that is allocated to a currency transaction. Currency managers find this to be a huge advantage because such high leverage can enhance their gains. However, this level of leverage also carries a substantial risk of loss for an investor.

Interest Rate Strategies

Fund managers who employ this sub-strategy generally invest in financial instruments that follow rates of global sovereign debt. These include instruments of the U.S. Treasury, European debt, and other debt of developed and emerging countries. While they are traded primarily in the cash or derivatives markets, derivative transactions traded on government debt are conducted on regulated futures exchanges.

Although the leverage in debt markets does not reach as high as it does in the currency markets, it is nevertheless substantial.

Stock Index Strategies

Users of this sub-strategy utilize equity indexes to create portfolios that outperform when interest rates move lower or remain neutral and growth within the equity index’s home country is on the rise. Although index strategies are generally used in a directional manner, many fund managers will trade indexes in a spread format in order to create relative value strategies. Equity indexes may be found on futures and options exchanges as well as on exchange traded funds.

Macro traders focus on liquid assets whose only risks are standard market risks such as credit or liquidity risk; all other risks are excluded. In addition to using fundamental factors to inform their trading decisions, many fund managers also rely on technical analysis. Other managers utilize commodity strategies that are formed by broadly followed markets such as oil, silver, and gold. Such instruments typically generate profitable price trends during times of inflation or deflation.

In order to succeed in utilizing this sub-strategy, a fund manager must employ strong risk reward controls and monitor economic and monetary factors that can change the pattern of worldwide capital flows.