Making a case for macro

Macro trading can offer adaptability, reactivity and diversification to portfolio performance, although the broad strategy category, which spans a wide range of results, is difficult to define. Speaking at the Investment Magazine Absolute Returns Conference, Guneet Rana, senior investment manager at Colonial First State, said she has a large allocation to macro in the alternatives portfolio she manages. The portfolio aims for cash-plus 4 per cent returns, low correlation to equity markets and volatility roughly half that of equities, while also serving a diversification role within the broader fund. Rana uses a framework that sorts manager strategies into risk-off diversifiers, core alpha diversifiers and risk-on diversifiers. She placed macro in the middle bucket as a core alpha diversifier and said her macro allocation is close to 55 per cent, "a big number."

Edward Tricker, chief investment officer of quantitative strategies at Graham Capital, said successful systematic macro strategies have shown adaptability. He noted that market conditions have been highly changeable and that no single implementation of an idea has been clearly best over the past decade. He pointed to suppressed market volatility stemming from unprecedented global monetary policy, as well as geopolitical shocks such as the Brexit vote and Donald Trump's 2016 US presidential election. Tricker emphasised the need for strategies that can respond rapidly when unforeseen events occur. He also cautioned that diversification is "a difficult thing to get right," warning that adding strategies without clear purpose can create leverage problems or misaligned exposures.

Brett Gillespie, head of global macro at Ellerston Capital, addressed the sources of low inflation, which his firm's economists have studied. He argued that technology is a minor factor, as directly tech-related items make up only 1.5 per cent of the US CPI basket, and that deflationary pressure from Chinese export prices to the US has faded, with those prices now rising about 1 per cent after falling 3 to 4 per cent a few years earlier. He identified demographics as a larger driver, with Baby Boomers exiting Western workforces and Millennials early in their careers experiencing slower wage growth. Gillespie estimated this effect reduces US wage inflation by 0.7 per cent and expects it to persist until about 2020, when Boomers retire and Millennials move into prime earning years. He expects the trend to begin a year earlier, in 2019, in Australia. He also cited a "massive output gap" and limited re-leveraging since the global financial crisis as explanations for subdued volatility, and suggested adaptive, discretionary strategies could offer protection given the uncertainty over how long these conditions last.

Rana was more critical of how managers have responded to poor performance. She said some managers who ran systematic macro strategies through a difficult recent period have relaunched their offerings as risk-premia strategies, which she characterised as a rebadged and commoditised version of systematically captured premia sold at a lower price point.