Global Macro Hedge Fund Strategy Paper

Customized Hedge Fund Portfolio Solutions for Advisors

H E D G E F U N D S T R AT E G I E S

Global Macro

Q2 2013


Introduction

Global Macro
Hedge Fund
Strategy
The global macro hedge fund strategy is one of the more op-

While global macro and equity long/short managers may both

portunistic and unconstrained hedge fund strategies whereby

invest in equity securities, the prevailing thesis underpinning a

managers canvass the global economic landscape and seek to

particular investment for a global macro manager is the impact

profit from macroeconomic imbalances and geopolitical events.

a movement in underlying macroeconomic variables may have

Global macro managers pursue a top down investing approach
and trade a broad range of strategies in which the investment
process is predicated on movements in underlying economic

on a security price. This is in contrast to an equity long/short
manager where fundamental characteristics of a company are
central to the investment thesis.

variables and their potential impact on equity, fixed income,

Global macro managers are largely active in liquid trading

currency, and commodity markets. Global macro managers

markets, which offers the ability to quickly exploit opportunities

can execute the strategy in a number of ways, including on a

as they present themselves in the global capital markets. The

discretionary or systematic basis, through a sole risk-taker or

unconstrained mandate and “nimbleness” of global macro man-

multi-manager platform approach, and/or over a long or short

agers has produced attractive absolute and risk-adjusted returns

term holding period.

over multiple time periods. Additionally, global macro managers

In addition, global macro hedge funds can pursue directional
or relative value trading strategies. With a directional trading
strategy, the manager takes a directional view that the market or
trading instrument will increase or decrease in value whereas a
global macro relative value strategy is predicated on the potential future movements in underlying instruments.

Q2 2013

generally exhibit low correlation to traditional asset classes and,
therefore, incorporating the strategy into a portfolio of stocks and
bonds has the potential to enhance overall returns while also
decreasing the level of risk assumed.


What are

Global
Macro
Funds?

Global macro hedge funds employ a top-down investment approach and generally analyze macroeconomic variables, such as a country’s GDP growth trends, inflation expectations, employment levels, and money supply, in order to assess the potential pricing
impact a change in one or more of these variables would have on a region’s equity,
sovereign debt, commodity, and/or currency markets.
Many global macro hedge funds—particularly institutional-quality global macro hedge
funds—not only employ a team of seasoned traders but also a team of economic researchers and distinguished economists who evaluate the investable economic landscape.
In addition, it is not uncommon for institutional-quality managers to retain the services
of prominent economic and political policymakers who have a history of government
service and are able to provide access to current officials and policy-setters. For instance, Lawrence Summers, the former Secretary of the Treasury, currently serves as a

consultant to D.E. Shaw & Co. and Sushil Wadhwani, a former member of the Monetary Policy Committee of the Bank of England, is
currently a partner with Caxton Associates.
The research process is further aided by the ability of institutional-quality managers to support a global presence, which allows for a
microeconomic perspective to a region’s macroeconomic environment. With global macro managers conducting top-down economic
research across multiple regions, as well as evaluating various financial instruments in search for the greatest risk/reward tradeoff,
global macro funds will dynamically shift their exposures to the most compelling opportunities. As such, the strategy is known for its
unconstrained mandate and its performance is largely independent of some ancillary event such as deal flow (i.e., merger arbitrage) or
adequate issuance supply (i.e., convertible bond arbitrage).

Q2 2013


Global Macro Sub-Strategies
The global macro strategy can be pursued using a discretionary or systematic approach.

Discretionary
vs. Systematic

A discretionary global macro manager conducts detailed macroeconomic research and generally aims to uncover a select number of investment themes that offer the potential to contribute
positively to returns. Institutional-quality hedge funds that predominantly pursue a discretionary global macro approach include Brevan Howard, Caxton Associates, Fortress Investment
Group, and Moore Capital Management.

A systematic global macro manager utilizes proprietary computer algorithms and predefined trading rules to execute buy and sell orders. Institutional-quality hedge funds that exclusively or in part pursue a systematic global macro strategy include Two Sigma Advisors
and D.E. Shaw & Co.

Directional vs.
Relative Value

Global macro hedge funds can also take a directional and/or a relative value approach to
global macro investing.
A directional trade is characterized by the manager taking a directional view that a particular
market will increase or decrease in value. A recent example of a relevant directional global
macro trade would be the short Japanese Yen trade that several global macro managers have

initiated as a result of the newly elected Prime Minister, Shinzo Abe, urging for more aggressive monetary policy actions to spur growth.
With a relative value trade, the manager attempts to exploit pricing inefficiencies between financial instruments. For example, with
regards to interest rate trading strategies, a global macro manager may seek to profit from the shape of the yield curve in which the
spread between two maturities is increasing. To effectively capture this change in spread, the manager would take a long position in
the shorter maturity to capitalize on prices increasing (i.e., falling rates) and a short position in the longer maturity in order to capitalize
on prices falling (i.e., rising rates). This relative value strategy is known as a curve steepener trade. Conversely, the manager would
implement a curve flattener trade if the spread between the two maturities was expected to decrease.

The global macro strategy has undoubtedly evolved since the days when notable macro trad-

Multi-Manager
vs. Single Risk
Taker

ers like Louis Moore Bacon of Moore Capital Management and Paul Tudor Jones of Tudor
Investment Corp. dominated the industry. Although these notable macro traders still remain
actively involved and hold trading authority, the organizations that these and other luminaries
represent have largely developed into multi-manager platforms that offer diversification across
risk-takers, strategies, and regions.
Many distinguished global macro traders have essentially transitioned into a chief investment

officer role where they can apply their trading acumen and experience to the capital allocation process in order to determine the
appropriate amount of capital an underlying trader should oversee. In some select cases, the firm’s CIO may elect not to maintain any
trading allocation in the fund. In these instances, the objective of the firm is to minimize occurrences where an underlying manager
would feel compelled to subscribe to their CIO’s macro viewpoint, which potentially could have the negative consequence of increasing
the pairwise correlation of the underlying managers.
Institutional-quality hedge funds in which investment decisions reside with a limited number of risk-takers include the Fortress Macro
Fund and the Moore Remington Fund. The more prevalent multi-manager platform approach is pursued by a number of institutional-quality funds including the Caxton Global Fund, the Graham Discretionary Fund, and the Moore Macro Managers Fund.

Q2 2013


The Advantages of

Macro Funds
Performance Evaluation
DJCS Global Macro HF Index - 10 Year
Annualized RoR

Cumulative Value

Max Drawdown

% Months Positive

-14.94%

9.59%

Std. Deviation

76.42%

Global Macro HF Index—have historically delivered attractive absolute and relative returns over the course of
multiple time periods.
funds have returned 9.6% with a volatility of 5.3%, which

Sortino Ratio

Correl to S&P 500

translates into an attractive Sharpe ratio of 1.44. In comparison, the S&P 500 over the same time period returned

255.72

5.8% with a volatility of 14.7% and a Sharpe ratio of 0.35.

1.44

Q2 2013

Global macro hedge funds—as represented by the DJCS

For instance, over the past 10 years, global macro hedge

5.33%
Sharpe Ratio

Attractive Absolute &
Relative Returns

0.61

0.28


Liquidity as a Source of Alpha
Global macro hedge funds are recognized for being one of

ager lost -4.6% on the year and experienced a drawdown of -14.9%.

the more liquid hedge fund strategies as they participate in a

This performance handily outshines that of the broad equity markets

number of actively traded markets. This liquidity, as well as their

which saw the S&P 500 decline -38.5% and generate a drawdown

unconstrained mandate, can be a source of alpha as global

of over 50% during the crisis.

macro managers are able to swiftly adjust exposures and seek
to exploit opportunities as they develop globally.

Similar trends can be found during the 2000-2003 bear market as
well. As Table 1 illustrates, global macro managers have generally

This level of nimbleness also offers global macro managers

generated positive performance across the 10 worst quarters for the

the ability to preserve capital in periods of stress. For instance,

S&P 500.

during the 2008 financial crisis the average global macro man-

Table 1:
Performance of DJCS Global Macro Index During Top 10 Worst Quarters for S&P 500 Performance
Q4-2008

Q3-2002

Q3-2001

Q3-2011

Q2-2002

Q1-2001

Q2-2010

Q1-2009

Q3-1998

Q1-2008

7.20%
4.18%

2.89%

4.42%

3.95%

Average

6.88%
1.58%

2.58%

2.30%

-2.60%

-14.98%

-14.33%

-13.74%

-12.12%

-11.67%

-11.86%

-8.09%
-9.93%
-10.30%
-13.91%

- 17.63%
S&P 500

-22.55%
19.95%

21.81%

17.87%

18.75%

Performance Differential
17.69%
19.32%
13.44%

DJCS Global Macro Index

14.24%

2.22%

16.81%

16.21%

Table 2:
Performance of DJCS Global Macro Index During Top 10 Worst Quarters for HF Performance
Q3-2008

Q4-2008

Q3-1998

Q3-2011

Q3-2001

Q3-2002

Q1-2008

Q4-2000

Q2-2012

Q2-2010

Average

10.23%
6.88%
4.42%

-2.60%

-9.60%

-9.19%

- 4.03%

-6.76%
-8.09%
-8.80%

-10.34%
-0.74%

Q2 2013

6.59%

2.89%

0.71%

11.81%

4.18%

3.95%
0.77%

1.58%

-3.85%

-3.44%

-3.26%

-2.83%

HFRI Fund Weighted
Performance Differential
6.92%
8.03%
10.33%

13.49%

-2.67%
-5.44%


1.40%

4.24%

6.21%


Low Correlation To Traditional Asset Classes
The nimbleness of global macro managers has largely
allowed them to side step market drawdowns and
has aided them in the ability to generate returns that
are not highly correlated to traditional asset classes.
These low correlation properties translate into diversification benefits when added to a traditional portfolio of

vs. Other Major Indices
Correlation Matrix (10yr)

Global Macro

MSCI World

0.37

S&P 500

0.28

Global Macro Index decreased the portfolio’s volatility

Barclays U.S. Aggregate Bond Index

0.29

by 170bps, boosted returns by over 100bps, and pro-

HFRI Fund Weighted Index

0.58

60% stocks and 40% bonds.
As highlighted in Table 3, a 25% allocation to the DJCS

vided 729bps of downside protection.

Table 3:
Statistics of a Traditional Portfolio With 25% DJCS Macro vs. Traditional Portfolio
Traditional Portfolio W / DJCS 25%
From: January 2003 To: March 2013

Traditional Portfolio
From: January 2003 To: March 2013

Annualized ROR

6.84%

5.79%

Std. Deviation

7.27%

8.97%

-26.56%

-33.85%

67.48%

65.04%

Max Drawdown
Percent Months Positive
Cumulative Value

197.05

178.12

Sharpe Ratio

0.72

0.49

Sortino Ratio

0.43

0.21

Asymmetry (Skewness)

-1.19

-0.95

Peakedness (Kurtosis)

4.30

3.02

Q2 2013


Conclusion

Global macro managers have historically performed well during challenging times and can assist in providing a level of stability to an overall portfolio. Advisors seeking diversification, liquidity, and uncorrelated returns

from traditional stock and bond portfolios should carefully consider the potential benefits of including global macro funds within
a larger investment portfolio.

Using CrystalTools© to

Evaluate Macro Managers
Advisors should consider using CrystalTools© before investing in any asset class or with an individual fund.

CrystalAnalyticsTM – to obtain a bet-

CrystalResearchTM – to gain a better

CrystalPortfoliosTM – to run a sim-

ter quantitative understanding of the

qualitative assessment of the manag-

ulation of pro-forma returns to better

manager’s historical characteristics and

er. Learn about their trading strategy,

understand the historical performance

individual return profile:

review their liquidity and provide an

of a portfolio as well as the effect of

overall assessment of the institutional-

adding and removing managers.

ity of a manager.

Below are a few examples of some of
the analytics that CrystalTools© offers.
Monthly Returns - can be used to review
the manager’s annualized net returns, risk
adjusted returns and individual performance
during particular months. For example, advisors can review performance during the
worst periods for equity markets and hedge
funds, as described above.
Returns Histogram – reviewing the returns
histogram will provide the advisor with a better visual understanding of the consistency of
the fund manager’s returns.
Drawdowns – allows the advisor to review
the fund manager’s largest drawdown periods on a twelve month and thirty six month
basis.

Q2 2013


IMPORTANT DISCLOSURE
This Document is for informational purposes only and is not an offer to sell or the solicitation of an offer to buy an interest in any of the Funds managed or advised by Crystal Capital Partners, LLC
(“Crystal”). This document contains only summary information about the Funds and is qualified in its entirety by, and should be read in conjunction with, the more detailed information contained in
the Offering Memorandum for each Fund.
The interests in the Fund have not been registered with the SEC under the Securities Act, or under the securities laws of any state of the United States or under the securities laws of any other
jurisdiction, and the Funds have not been registered as an investment company under the Investment Company Act of 1940, as amended, and are being offered and sold in reliance on exemptions
from the registration requirements of such laws.
The information contained in this Document has been prepared to assist interested parties in making their own evaluation of the opportunity and does not purport to be complete or to contain all of
the information that a prospective investor might consider important in connection with an investment in the Fund. In all cases, interested parties should conduct their own investigation and analysis of
the Fund, the data set forth in this Document and such other data as they may consider relevant to an investment decision. The information contained in this Document does not constitute legal, tax,
accounting, regulatory or investment advice, and persons considering an investment in the Fund should consult their own legal and financial advisors with respect to the application of United States
securities, tax or other laws and accounting and regulatory provisions to their particular, as well as any consequences arising under the laws of any other jurisdiction.
The liquidity schedule constitutes the “best available” liquidity as of the date hereof. The liquidity terms described are for a particular exposure. From time to time, the Fund and/or the Outside Portfolio
Manager may offer different liquidity terms. “Best available” liquidity assumes availability when soft lock terms are applicable.
The pro forma results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not
represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack
of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account
will or is likely to achieve profits or losses similar to these being shown.
THE PRO FORMA COMPOSITE PERFORMANCE RECORD IS HYPOTHETICAL AND THESE TRADING ADVISORS HAVE NOT TRADED TOGETHER IN THE MANNER SHOWN IN THE
COMPOSITE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE
THAT ANY MULTI-ADVISOR MANAGED ACCOUNT OR POOL WILL OR IS LIKELY TO ACHIEVE A COMPOSITE PERFORMANCE RECORD SIMILAR TO THAT SHOWN. IN FACT, THERE ARE
FREQUENTLY SHARP DIFFERENCES BETWEEN A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD AND THE ACTUAL RECORD SUBSEQUENTLY ACHIEVED.
ONE OF THE LIMITATIONS OF A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD IS THAT DECISIONS RELATING TO THE SELECTION OF TRADING ADVISORS AND THE ALLOCATION OF ASSETS AMONG THOSE TRADING ADVISORS WERE MADE WITH THE BENEFIT OF HINDSIGHT BASED UPON THE HISTORICAL RATES OF RETURN OF THE SELECTED
TRADING ADVISORS. THEREFORE, COMPOSITE PERFORMANCE RECORDS INVARIABLY SHOW POSITIVE RATES OF RETURN. ANOTHER INHERENT LIMITATION ON THESE RESULTS
IS THAT THE ALLOCATION DECISIONS REFLECTED IN THE PERFORMANCE RECORD WERE NOT MADE UNDER ACTUAL MARKET CONDITIONS AND, THEREFORE, CANNOT COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FURTHERMORE, THE COMPOSITE PERFORMANCE RECORD MAY BE DISTORTED BECAUSE THE
ALLOCATION OF ASSETS CHANGES FROM TIME TO TIME AND THESE ADJUSTMENTS ARE NOT REFLECTED IN THE COMPOSITE.
The Fund and/or the Fund Manager use several sources of information to support the analysis in this Document, including information provided by investment managers, third party databases,
and other public and non-public sources. The Fund and/or the Fund Manager will make commercially reasonable efforts to ensure the reliability of the information, but make no warranty as to the
accuracy, completeness or suitability of the information. Such information is further subject to the qualifications and limitations contained in the Terms of Use Agreement and the Disclaimer made
part of each fund report.
The interests in the Fund are speculative, illiquid, involve substantial risk, and are a suitable investment only for a limited portion of an investor’s portfolio. Investors could lose all or substantially all
of their investment in the Fund. Neither the delivery of this Document nor any offers or sales hereunder shall create an implication that there has been no change since the date of this Document or
the Offering Memorandum in the matters disclosed herein. Before you decide to invest, read the entire Offering Memorandum for the specific fund of interest carefully, and in particular, consider the
“Risk Factor” section. If you, or your advisors, have questions concerning the operations, you should contact the Fund Manager at the address or phone number included in the Offering Memorandum.
None of the directors, officers, employees or advisers of Crystal or its affiliates or any other person makes any promise, guarantee, representation or warranty (expressed or implied) to any person
as to the fairness, accuracy or completeness of this Document or the information contained herein, or of any other information, materials or opinions, whether written or oral, that have been, or may
be, prepared or furnished by any of those companies, including, without limitation, economic or financial projections, if any, or risk evaluations.
The recipient acknowledges and agrees that all of the information contained herein is confidential, and if the recipient has previously accepted this Document, signed or agreed to Crystal’s Terms of
Use Agreement or Non-Disclosure Agreement, is subject thereto. Without limiting the generality of the foregoing: (1) the recipient will not reproduce this Document, in whole or in part; (2) if the recipient
does not wish to pursue this matter or is not an “Accredited Investor” within the meaning of Rule 501(a) under the Securities Act of 1933 and/or a “Qualified Purchaser” as such term is defined in
the Investment Company Act of 1940, as amended and (the “Securities Act”), it must return this Document to Crystal, as soon as practicable, together with any other materials relating to the Fund,
which the recipient may have received, or must destroy this Document and such other materials as soon as practicable and, in each case, must destroy, as soon as practicable, all copies of analyses,
compilations, studies or other documents prepared by it in connection with any information in this Document or such other materials.
Please see the Help Section of the website (? Icon) for additional disclosures and definitions of certain terms and comparison indices.

Crystal Capital Partners, LLC
1111 Kane Concourse, Suite 404
Bay Harbor Islands, FL 33154
T. (305) 868 - 1500
F. (305) 868 - 1595
www.crystalfunds.com

Q2 2013

Global Macro Hedge Fund Strategy Paper

More Related Content

Similar to Global Macro Hedge Fund Strategy Paper (20)

Recently uploaded (20)

Global Macro Hedge Fund Strategy Paper