Friday, February 6, 2009

Macro Musings

Here is an interesting article on macro funds and hedge funds in general:

Of course, if people do “flock to global macro” as the article says, it will bankrupt the strategy.

A problem with macro over the long term is that it often comes to resemble rank gambling. Managers can make billions on each trade – or lose billions. They sell the strategy with historic bets like George Soros and sterling in 1992. But I am sure they fail to mention the innumerable historic blow-outs.

Also, the catch is that global macro is usually way more difficult than it has been lately. Over the past few years, the strategy was insanely simple: long commodities, long BRICs, short the dollar, short financials. These were one-way bets with every manager on one side of the trade.

The interesting thing is, each time this happens, everyone says that funds can’t move the market. The markets that these managers operate in are too big to be influenced – like crude oil, last summer. And then the market collapses and in hindsight we find that everyone was on one side of the trade and it created a bubble. It is important to maintain a healthy degree of skepticism with virtually everything along these lines.

A current example might be oil production and supply. I’ve heard many people make claims that production is down and supply is down, as if we
re back in 2003. So after a decade of skyrocketing prices and activity in the energy sector, production and supply are down?

This is a complete lie, no matter what the numbers say. The government or the central bank or whoever else will diligently present figures showing a certain case; but you’ll always do better using common sense. The people producing the data are backwards-looking by definition, and always way behind the curve.

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.