Managed Futures and Global Macro

Note:  I do not advocate macro trading (or trend trading, or trading of any kind, really).  But in interest of giving equal time to the opposing side, I bring you this guest post by The Macro Trader…

Managed futures and global macro are two different strategies that often times are mistakenly lumped into the same category.  Of course while they are, or at least can be two totally different strategies they do have some similarities.  They both trade in the futures markets where their is vast and deep liquidity.  They also both trade in several different asset classes  Of course while this sounds like the same thing you will see that the primary difference is that one, managed futures, plays the part of the insurance company or casino, and that the other, global macro, trades using risk management and in depth research into the individual markets. On top of that they also can get a lot more specific with most of their ideas than can their managed futures counterparts.

Managed futures typically consists of a CTA or commodity trading advisor.  Most CTA’s do what is called long term trend following and build an automatic technical analysis based system that attempts to follow the long term trends in the market.  How do they get an edge by simply following trends?  The main tool is to use proper risk management.  To be a successful futures trader you have to have a good position sizing algorithm, market selection method, figure out how much to risk per trade, and basically build an expectancy model not unlike that of an insurance company or a casino.  When done properly a CTA can do well and does in fact trade in hundreds of different futures markets.

Global macro is a strategy that prides itself in being able to trade in any market anywhere.  Stocks, bonds, commodities, and currencies are the primary markets for a macro trader but they can even deal in real estate and private equity if they so desire.  While there are many the primary difference between managed futures and global macro is the way in which they select trading opportunities.  Whereas managed futures attempt to systematically be involved in almost all markets either long or short, the global macro trader is trying to be in the best risk to reward scenarios on the globe.  They look for the best trades on a risk reward basis all the while managing risk.  Instead of following a technical model the typical macro trader will spend hours reading over central bank statements, different industry reports, and following different political regimes inside of different countries.  While the head of the bank of New Zealand is trying to figure out how to manage his nations finances the macro trader is trying to figure out how that will affect stocks, bonds, currencies, and commodities in that region.

Hopefully this has been enlightening to you and you now understand more of the differences between global macro and managed futures.  They are both great strategy groups and can fit into many different portfolios but they are not the same thing anymore than a long short equity hedge fund is the same as a long only technology fund.  Yes, they both trade stocks but they do it completely differently.