Many fund managers have been saying that we are in another bubble, but this time it is different. Not in the sense that “It won’t happen this time,” but in the sense that it is a global bubble and that almost every asset class is taking part in the bubble.
Jeremy Grantham recently popularized this concept with his paper
It’s Everywhere, In Everything: The First Truly Global Bubble
There are several articles worth of information and opinions here but my question today is: If there really is an all asset class bubble, who will be able to profit from it? Probably not your mutual fund manager since he is most likely long only and 98% invested, probably not your bond fund manager since he is also most likely held to the same long only and mostly invested constraints, probably not your private equity fund since money would dry up and we would be in a slow if not retracting economy, etc. Basically the majority of fund managers out there not only won’t profit from it but because of their investment constraints they will most likely lose a lot of money from it.
So who is left to profit from popping bubbles? Funds that have a flexible mandate. Obviously we feel that Global Macro Funds should benefit the most from this type of scenario. Other types of trading that should benefit would be CTA’s, good Short Sellers, and funds that for the most part are long volatility.
The Macro Trader
P.S. download and read the Grantham paper. Even if you disagree with what he says it will make you think.
What makes a potential investment good is a question that doesn’t get asked enough by most investors. If you asked your average investor that question you would get one of two answers 1-One that goes up and 2-One with good management and blah, blah, blah. If you ask an excellent trader what makes an investment a good one they would say that it is a good investment in regards to risk versus reward.
Most investors don’t focus near enough time on risk versus reward and instead only see the reward side of things. For example back in March of 2000 if you had asked most people what should I get into they would have said internet stocks. Why? Because they are all growing at a bazillion% a day and in a few years every man, women, dog, cat, etc. will be doing everything online. Only a few times did I ever here someone describe XYZ or maybe more appropriately WXYZ a good investment because it has a 200% growth rate and it is trading at a good multiple and it has something else going for it so even if the internet ends up being a fad you end up doing alright in the stock. Nope I don’t think any of us heard that nearly enough.
All most people see is the upside. In order to be successful long term it is imperative that you look at and for the negative as well as the positives when choosing where to put your money. If you are looking at a stock not only do you want a good story but you should also search for the bad story. What could go wrong? What will we do if it does go wrong? What else could go wrong? These are the right questions. If it is a bond then you have to worry about the issuing country, the countries interest rates, that countries business prospects, the world interest rates, etc. For every good thing you see in an investment you should be searching for that many bad or potentially bad things. Doing this vastly increases the likelihood of coming out on top. But just as importantly it insures that even when you lose you lose small. There are no shortcuts in this business. Nothing goes up in a straight line forever but you can make your line have less big dips by focusing on the risk just as much as on the reward.
The Macro Trader
“I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: Fundamentals, Technicals, and Market Tone. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.” -Michael Marcus
The Macro Trader
Global Macro Trading is different from other trading strategies such as long equities, fixed income arbitrage, or other strategies. Instead of being put in a style box Global Macro Trading is characterized as being able to go anywhere in the world, trading any instrument, using any strategy. Basically the objective of a Global Macro Trader is to find the absolute best risk/reward situations on the planet earth.
Many of the best traders of our time are Global Macro Traders. Probably the most well-known Global Macro Trader is George Soros. In 1970 he started the Quantum Fund with Jim Rogers and since then he has averaged around 30% a year building up his net worth to the tune of about eight billion dollars. Other well known Global Macro Traders are Paul Tudor Jones, Bruce Kovner, Michael Steinhardt, Julian Robertson, Stanley Druckenmiller, Nick Roditi, and Louis Bacon. What do all of these traders have in common apart from their basic trading styles? They have all done exceptionally well running multi-billion dollar funds. Everyone that I have named have averaged over 20% a year for fifteen plus years. It’s safe to say that they are some of the best traders ever.
Why do so many great traders gravitate to this style of trading? As noted above Global Macro Traders go anywhere and everywhere looking for great risk-adjusted rewards. Look at the chart below. It is a chart of $10,000 invested in the Barclay Group’s Global Macro Index with the SP500 returns overlaid from 1997 to now.
What stands out the most from this chart isn’t just that the Macro Trading Index beat the SP500 by over 50%. What stands out the most is that the SP500 had a 47% drawdown and the Macro Trading Index only had a 2.81% drawdown during the same time.
What does this say to me? It says that being tied to one asset class, in one country, to one strategy is very limiting and can be very painful to your portfolio as well. With Global Macro you are able to go anywhere for the best risk/reward situations available.
The Macro Trader