Graham Capital Management

Fireside Insights: Navigating the Evolving Macro Landscape

Posted on June 24, 2025June 24, 2025 by emessina

At the 2025 MFA iConnections Global Alts conference in New York, Graham’s Chairman and Founder, Ken Tropin, joined Kadmiel Onodje, Senior Investment Director at NEPC, for a candid and wide-ranging fireside conversation. The discussion offered timely insights into the current environment, the evolving role of global macro in portfolio construction, and how experienced managers are adapting to an increasingly complex world.

Key themes include:

Macro Relevance Today: With rising geopolitical tensions, shifting rate policies, and persistent inflation, global macro has reemerged as a critical diversifier. Ken shares why macro strategies remain essential as traditional asset correlations evolve.
Talent and Tenure in a Dynamic Industry: The conversation explored what it takes to build and sustain a culture that retains top talent for decades.
Discretionary and Quantitative Synergy: Ken speaks about the complementary strengths of discretionary and systematic macro approaches, noting how combining the two can lead to more robust outcomes and better adaptability across varied market environments.
The Role of Innovation and Data: As data becomes increasingly central to investment decision-making, Ken reflected on how innovation must be paired with sound judgment to truly create an edge.
Risk Management in a Shifting World: From regional conflicts to policy-driven shocks, the conversation covered how managers must evolve their risk frameworks to remain resilient in a more volatile and uncertain environment.

The session offered a forward-looking perspective on where opportunities may emerge in the next phase of the global macro cycle, as well as the foundational elements needed to build enduring investment organizations.

Watch the full discussion in the below video:

Full Transcript

Kenneth G. Tropin
Chairman and Founder

Kenneth G. Tropin is the Chairman and the founder of Graham Capital Management, L.P. (“Graham”). Mr. Tropin founded Graham in 1994 and over the last 30 years has grown the firm into an industry leading alternative investment manager focusing on global macro discretionary and quantitative hedge fund strategies. Mr. Tropin is currently the Chairman of the firm’s Executive and Investment Committees and a member of the firm’s Risk Committee. Additionally, Mr. Tropin is responsible for managing the strategic investment of the firm’s proprietary capital. Prior to founding Graham, Mr. Tropin had significant experience in the alternative investment industry, including five years (1989 to 1993) as President and Chief Executive Officer of John W. Henry & Company, Inc. and seven years (1982 to 1989) as Senior Vice President and Director of Managed Futures at Dean Witter Reynolds. Mr. Tropin has also served as Chairman of the Managed Funds Association and its predecessor organization, which he was instrumental in founding during the 1980s.

IMPORTANT DISCLOSURE

This document is neither an offer to sell nor a solicitation of any offer to buy shares in any fund managed by Graham and should not be relied on in making any investment decision. Any offering is made only pursuant to the relevant prospectus, together with the current financial statements of the relevant fund and the relevant subscription documents all of which must be read in their entirety. No offer to purchase shares will be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation. The shares have not and will not be registered for sale, and there will be no public offering of the shares. No offer to sell (or solicitation of an offer to buy) will be made in any jurisdiction in which such offer or solicitation would be unlawful. No representation is given that any statements made in this document are correct or that objectives will be achieved. This document may contain opinions of Graham and such opinions are subject to change without notice. Information provided about positions, if any, and attributable performance is intended to provide a balanced commentary, with examples of both profitable and loss-making positions, however this cannot be guaranteed.

It should not be assumed that investments that are described herein will be profitable. Nothing described herein is intended to imply that an investment in the fund is safe, conservative, risk free or risk averse. An investment in funds managed by Graham entails substantial risks and a prospective investor should carefully consider the summary of risk factors included in the Private Offering Memorandum entitled “Risk Factors” in determining whether an investment in the Fund is suitable. This investment does not consider the specific investment objective, financial situation or particular needs of any investor and an investment in the funds managed by Graham is not suitable for all investors. Prospective investors should not rely upon this document for tax, accounting or legal advice. Prospective investors should consult their own tax, legal accounting or other advisors about the issues discussed herein. Investors are also reminded that past performance should not be seen as an indication of future performance and that they might not get back the amount that they originally invested. The price of shares of the funds managed by Graham can go down as well as up and be affected by changes in rates of exchange. No recommendation is made positive or otherwise regarding individual securities mentioned herein.

This presentation includes statements that may constitute forward-looking statements. These statements may be identified by words such as “expects,” “looks forward to,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” estimates,” “will,” “project” or words of similar meaning. In addition, our representatives may from time to time make oral forward-looking statements. Such statements are based on the current expectations and certain assumptions of GCM’s management, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond GCM’s control, affect the operations, performance, business strategy and results of the accounts that it manages and could cause the actual results, performance or achievements of such accounts to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements or anticipated on the basis of historical trends.

Tables, charts and commentary contained in this document have been prepared on a best-efforts basis by Graham using sources it believes to be reliable although it does not guarantee the accuracy of the information on account of possible errors or omissions in the constituent data or calculations. No part of this document may be divulged to any other person, distributed, resold and/or reproduced without the prior written permission of Graham.

Staying the Course, Shifting the Sails: Lessons from Market Crises

Posted on April 30, 2025April 30, 2025 by lkarpinski

Building for the Long Run through Calm and Crisis

In an environment of constant change, building resilient portfolios requires both a steady focus on long-term goals and the flexibility to respond to shifting conditions. Over the past three decades, Graham Capital Management has successfully navigated a range of disruptions, from rate shocks to financial crises, building a clearer understanding of what contributes to portfolio resilience. While each crisis is different, history offers valuable perspective.

Staying Anchored but Agile: Market stress often raises the question: stay the course or adjust? At the portfolio level, staying aligned with core investment objectives is important, as reactionary changes often do more harm than good. At the strategy level, however, active risk management is important: rebalancing exposures, adjusting positioning, or reducing risk as conditions evolve. This balance between long-term discipline and short-term agility is at the heart of resilient investing.

Conviction during Uncertainty: Maintaining exposure to diversifying, uncorrelated strategies can add meaningful value over time, especially during prolonged market drawdowns. And while even diversified, non-correlated approaches can struggle in the short run during sharp volatility spikes, history suggests that they realign with broader market trends during persistent dislocations. In past episodes like the dot-com bust, the Global Financial Crisis, and 2022’s inflation-driven drawdown, many diversifying strategies initially lagged but went on to deliver strong performance as trends took hold.

🔎 Explore the Timeline: This interactive timeline reflects on ten major market disruptions over 30 years. Use the interactive feature below for details on what happened, what we’ve learned, and how those lessons continue to inform our approach today.

Top Lessons Across Market Crises

What 10 Crises Taught Us About Building Resilient Portfolios

Diversification Beyond Stocks & BondsAsset classes can fail in tandem. Diversifying strategies with low conditional correlation can add structural resilience.
[Relevant Periods: 2000, 2008, 2022]
Human Judgment in CrisisSystematic models are powerful when markets are stable and transparent. When markets are volatile and impacted by unprecedented or idiosyncratic events, data can be fragile and elusive, and discretion, experience, and intuition become important.
[Relevant Periods: 1998, 2010, 2020]
Active Risk ManagementIn fast-moving markets, flexibility in execution and thoughtful position sizing is critical. Dynamic risk management is as much art as science, requiring judgment and adaptability.
[Relevant Periods: 1998, 2020, 2023]
Operational ResilienceWhen liquidity dries up or counterparties face stress, operational soundness matters as much as strategy. Robust infrastructure, risk oversight, and execution frameworks form a critical line of defense.
[Relevant Periods: 1998, 2008, 2011]
Interest Rate SensitivityRate cycles can create ripple effects across asset classes. A resilient portfolio actively manages duration and avoids overconcentration in rate-sensitive exposures.
[Relevant Periods: 2013, 2022, 2023]

METHODOLOGY NOTES

The crisis events highlighted represent 10 major market disruptions since the inception of Graham’s trading in 1994. These events were selected based on the following criteria, though the list is not exhaustive and other crises may also have had meaningful impacts on investors:

Global and Historical Relevance: Events must have affected multiple asset classes, economies, or regions, extending beyond a single country or market. Each crisis is widely recognized as a pivotal moment in market history with broad relevance for investor portfolios.

Identifiable Catalyst: Each crisis must have a clear trigger—such as a policy shift, geopolitical conflict, or economic imbalance—that initiated the market disruption.

Lasting Impact: Selected crises either led to sustained market effects or caused immediate disruptions with broader systemic implications.

IMPORTANT DISCLOSURE

Source of data: Graham Capital Management (“Graham”), unless otherwise stated.

Tables, charts and commentary contained in this document have been prepared on a best efforts basis by Graham using sources it believes to be reliable although it does not guarantee the accuracy of the information on account of possible errors or omissions in the constituent data or calculations. No part of this document may be divulged to any other person, distributed, resold and/or reproduced without the prior written permission of Graham.

Macro Across Monetary Regimes

Posted on January 21, 2025June 10, 2025 by emessina

Easing, Tightening, and Everything in Between:
The Role of Macro Strategies across Monetary Policy Regimes

Shifts in central bank policies often mark new market phases, though predicting these inflection points is notoriously challenging. As economic priorities evolve, central banks must carefully balance growth, labor markets, and inflation—easing rates enough to support growth without reigniting inflation. Amid these transitions, macro hedge funds play a unique role in diversifying risk within investment portfolios, particularly during periods of economic uncertainty. This analysis examines how macro strategies have historically performed across various monetary policy environments and explores the implications for traditional stock and bond portfolios.

MONETARY POLICY AS A CATALYST FOR MACRO STRATEGIES

At its core, global macro is a comprehensive strategy designed to capitalize on the effects of economic and geopolitical developments on global markets. By analyzing the impact of macroeconomic variables on interest rates, currencies, commodities, credit, and equities, global macro managers seek to position their portfolios to profit from both anticipated and unexpected shifts in the global landscape.

Monetary policy, deeply intertwined with economic fundamentals, often creates opportunities for macro strategies by driving directional price moves, market volatility, and dislocations. Historically, changes in policy rates have shown a positive relationship with the alpha generated by macro hedge funds, as illustrated below. This alpha arises not only from the policy shifts themselves but also from the economic catalysts that compel central banks to act.

Macro Alpha Increases with Monetary Policy Activity
Jan-90 to Dec-24

Additionally, the dispersion of G10 front-end rates, a proxy for global monetary policy divergence, has similarly shown a positive relationship with macro alpha generation, as shown below. When central banks adopt differing stances, it creates disparities in interest rates and economic outlooks across regions. These divergences can lead to substantial shifts in currency valuations, capital flows, and asset prices, creating trading opportunities for macro managers.

Macro Alpha Increases with Monetary Policy Dispersion¹
Jan-00 to Dec-24

This analysis explores how macro has historically performed across different monetary policy regimes. Importantly, as a multi-variate strategy with a wide range of trading drivers, the success of macro trading strategies is only captured after careful consideration of each regime’s unique economic dynamics. We see that macro strategies can adapt to evolving economic variables, often providing diversification to a broader portfolio when it is needed most.

DISSECTING PERFORMANCE ACROSS RATE REGIMES

The chart below compares average monthly returns of macro hedge funds and a 60/40 portfolio across different monetary policy regimes. A high-level view of these regimes shows that macro strategies have historically delivered positive returns in various environments—whether easing, tightening, or transitions in between. Notably, macro has outperformed traditional assets during monetary easing cycles, when central banks cut rates in response to crises or fragile economic conditions. This highlights macro managers’ ability to capitalize on dislocations when diversification is most critical.

While traditional assets also generate positive returns across cycles, the details of each regime reveal greater downside volatility for these assets, underscoring macro’s complementary role in portfolios. Importantly, performance is influenced not only by monetary policy shifts but also by the broader macroeconomic landscape, with key insights often found in the nuances of each regime.

Macro Returns Across Monetary Policy Regimes
January 1990 to December 2024

At a Glance

Easing Cycles
Macro strategies provide resilience and diversification during periods of economic stress, as central banks cut rates to stabilize economies.

Tightening Cycles
Hawkish policies weigh on financial markets, leading to subdued returns for many assets. Macro typically delivers positive, albeit modest, performance on average.

Policy Stability
During stable policy periods, equities historically outperformed, while macro funds delivered steady returns albeit with fewer directional trade opportunities.

Policy Transition Periods
Periods of policy uncertainty have historically created opportunities for macro strategies, which can tactically adjust to offset stock and bond volatility.

Periods of Central Bank Divergence
In periods of divergent monetary policies, macro strategies can capitalize on disparities in interest rates and regional economic outlooks.

EASING CYCLES

Easing cycles typically emerge during periods of economic stress, characterized by slowing growth, rising unemployment, or systemic financial crises. Central banks cut rates and deploy liquidity to ensure sustainable achievement of their price stability or full employment objectives. While such policy responses buoy risk assets like stocks, the underlying fragility of the economy often tempers gains. Bonds may benefit initially as yields decline, but their upside potential is capped in low-rate environments. Macro hedge funds have demonstrated resilience during easing cycles, often outperforming traditional 60/40 portfolios when central banks cut rates in response to crises. This highlights the defensive nature of macro strategies, which can thrive amidst a backdrop of a fragile economy, providing a complementary return stream to traditional investments.

Fed Easing Cycles
Average Monthly Returns

Early 2000s Dot-Com Bust and 9/11

The dot-com bubble burst, triggering a recession worsened by the 9/11 attacks. Equities collapsed, bonds outperformed as safe havens, and macro strategies navigated the volatility successfully. The Fed’s response — historically low interest rates — helped fuel a housing boom that later contributed to the 2008 financial crisis.

’07-’08 Housing Market Crash and GFC

The Fed’s first large-scale use of Quantitative Easing (QE) set a precedent for unconventional monetary policy. As the housing bubble burst and unemployment rose, the Fed slashed rates to zero and introduced QE to stabilize markets and the economy. Macro strategies capitalized on market dislocations, returning 11% in 2007 and 5% in 2008, while equities collapsed and U.S. bond prices rose. Though QE stabilized markets and lowered borrowing costs, it left lasting impacts, including prolonged ultra-low yields.

2020 Pandemic Response

This marked the fastest and most aggressive response to an economic crisis in Fed history, with additional tools like forward guidance. The Fed slashed rates to near zero in March 2020 and restarted QE to stabilize markets and support the economy during the COVID-19 pandemic. Equities plunged in March before rebounding quickly due to stimulus, bonds rallied as yields fell, and performance dispersion among macro funds increased as managers repositioned amidst the short and sharp reversal.

TIGHTENING CYCLES

Tightening cycles are typically introduced when inflationary pressures build or economies overheat. Historically, performance has been more muted across asset classes during tightening cycles. In equity markets, rising rates increase borrowing costs for corporations, suppressing profits and equity valuations. Bonds face similar headwinds, as higher yields erode the value of existing fixed-income securities. More importantly, as discussed in Macro-Economic-Drivers-of-the-Bond-Stock-Correlation (P. Calderini, August 2021), when stock market declines are driven by concerns about inflation or hawkish monetary policy, stocks and bonds may decline simultaneously, as we saw in 2022 when the 60/40 portfolio declined 17% on the year. Macro acts as an important diversifier during such periods.

Fed Hiking Cycles
Average Monthly Returns

2022-2023 Post-Pandemic Inflation Control

The March 2022 to July 2023 tightening cycle represented an unprecedented speed of rate hikes in the modern era, alongside a reduction in the Fed’s balance sheet (quantitative tightening). In response to the highest inflation in 40 years, the Fed rapidly raised rates from near zero to over 5% within a year.

Equities experienced sharp volatility and sell-offs as the rapid rate hikes created uncertainty around economic growth and corporate earnings. In 2022, equities experienced their worst peak-to-trough drawdown since the 2008 Global Financial Crisis, with the MSCI World declining -25% at the trough, and the S&P 500 declining -24%. By late 2023, optimism around potential rate stabilization or cuts led to selective rallies, with markets pricing in a “soft landing.”

Bond prices declined as yields soared, with the 10-year U.S. Treasury yield rising to its highest levels in over a decade as investors demanded higher returns for longer-duration assets amid tighter monetary policy. The rapid pace of short-term rate hikes led to a significant inversion of the yield curve, often seen as a harbinger of economic slowdown or recession.

Macro strategies, meanwhile, returned 9% on the year (as represented by the HFRI Macro Index) by capitalizing on large moves in interest rates, currencies, and commodities, providing welcome diversification to the simultaneous stock/bond selloff.

PERIODS OF STABILITY

In prolonged periods of expansive, stable monetary policy with stable inflation, equities typically outperform as risk sentiment improves. In such environments, macro funds often perform steadily but may not see the same upside as equities. With fewer catalysts to drive macroeconomic dislocations, opportunities for significant directional trades in equities, rates, currencies, and commodities may be more limited. Nonetheless, on average, both traditional assets and macro strategies have historically posted positive returns during periods of economic stability.

Periods of Fed Inactivity
Average Monthly Returns, No Rate Changes in 6+ Months

A “Golden Era” for Stocks and Bonds

The decade following the Great Recession was a “Golden Era” for stocks and bonds, characterized by prolonged near-zero interest rates. This period stood out not only for its accommodative monetary policy, including negative real rates in some countries, but also for the extended stretch of time with minimal central bank intervention, as highlighted in the table above. Equities thrived in this environment, experiencing a bull market fueled by cheap borrowing costs and abundant liquidity. Bonds also performed well, benefiting from central bank asset purchases, which supported bond prices. Meanwhile, macro strategies delivered positive, albeit more muted returns, as the low rate environment suppressed volatility and created range-bound markets.

TRANSITION PERIODS

Periods of policy uncertainty often present opportunities for macro strategies. Traditional assets also have the potential to perform well, but with greater downside variability, as shown below. Notably, macro strategies offer the ability to offset poor performance for stocks and bonds during these periods. At their best, macro strategies are tactical and can dynamically adjust to changing markets situations rather than taking a sticky long-term position.

Cumulative Returns 6 Months Before/After Easing Cycles

Cumulative Returns 6 Months Before/After Hiking Cycles

PERIODS OF CENTRAL BANK DIVERGENCE

As mentioned previously, when central banks adopt differing monetary policy stances, it creates disparities in interest rates and economic outlooks across regions. These divergences can lead to substantial shifts in currency valuations, capital flows, and asset prices, creating trading opportunities for macro managers. For example, central bank policies can inform currency carry trades, where macro managers borrow in low-interest-rate currencies to invest in higher-yielding assets.

In the chart below, G10 dispersion is defined as the cross-sectional standard deviation of rates within G10 countries. Here we use 1 year swap rates, which are generally considered to be sensitive to monetary policy expectations. We see that G10 dispersion declined sharply following a peak during the 2008 Global Financial Crisis. During the COVID-19 crisis in 2020, dispersion reached new lows as G10 central banks collectively infused liquidity into financial markets, coinciding with more subdued returns for macro strategies. However, the rise in dispersion starting in 2022 signaled a potential regime shift compared to much of the post-GFC period, with many macro managers capitalizing on the resulting directional trading opportunities in 2022 and beyond.

Macro Returns and G10 Rate Dispersion
January 2000 to December 2024

THE ROLE OF MACRO

Macro strategies excel in dynamic economic environments, including both easing and tightening cycles, as well as periods of transition marked by market volatility and dislocations. These strategies are particularly effective during heightened central bank intervention and economic uncertainty, with trading drivers that include monetary policy, inflation dynamics, and global economic divergence, among others. Conversely, in periods of low volatility and stable markets — often associated with policy normalization — macro opportunities are more muted as trends and inefficiencies become less pronounced.

Macro trading is inherently adaptive, driven by the analysis of diverse macroeconomic variables and their impact on global markets. Positions are dynamic, shifting with evolving themes over days or weeks. While monetary policy is a key driver, it operates within a broader, multivariate macroeconomic context. By offering low correlation to traditional asset classes, macro strategies enhance the resilience and diversification of a 60/40 portfolio, providing a critical edge in navigating complex financial landscapes.

Macro Trading Drivers

IMPORTANT DISCLOSURE

SOURCES

¹ G10 Monetary Policy is defined by the cross-sectional standard deviation (dispersion) of G10 1 year swap rates from January 2000 to September 2024. “Divergent” policy reflects periods when the dispersion is above the historical mean. Synchronous policy periods reflects periods when dispersion is below the historical mean. See also: Graham Capital Management, “Carry in Different Monetary Policy Regimes.” Graham Capital Management Quant Log, https://www.grahamcapital.com/quant-post/carry-in-different-monetary-policy-regimes/. Accessed 12/30/2024.

Rate regime category labels used in this analysis are based on historical classifications from Forbes Advisor. “Fed Funds Rate History: Its Highs, Lows and Everything In-Between.” Forbes, https://www.forbes.com/advisor/investing/fed-funds-rate-history/. Accessed 12/30/2024.

“Federal Funds Target Rate (Upper Limit) [DFEDTARU].” FRED, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DFEDTARU. Accessed 12/30/2024.

“Federal Funds Target Rate (Lower Limit) [DFEDTAR].” FRED, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DFEDTAR. Accessed 12/30/2024.

LEGAL DISCLAIMER

Source of data: Graham Capital Management (“Graham”), unless otherwise stated

This document is neither an offer to sell nor a solicitation of any offer to buy shares in any fund managed by Graham and should not be relied on in making any investment decision. Any offering is made only pursuant to the relevant prospectus, together with the current financial statements of the relevant fund and the relevant subscription documents all of which must be read in their entirety. No offer to purchase shares will be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation. The shares have not and will not be registered for sale, and there will be no public offering of the shares. No offer to sell (or solicitation of an offer to buy) will be made in any jurisdiction in which such offer or solicitation would be unlawful. No representation is given that any statements made in this document are correct or that objectives will be achieved. This document may contain opinions of Graham, and such opinions are subject to change without notice. Information provided about positions, if any, and attributable performance is intended to provide a balanced commentary, with examples of both profitable and loss-making positions, however this cannot be guaranteed.

This presentation includes statements that may constitute forward-looking statements. These statements may be identified by words such as “expects,” “looks forward to,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “project” or words of similar meaning. In addition, our representatives may from time to time make oral forward-looking statements. Such statements are based on the current expectations and certain assumptions of Graham’s management, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Graham’s control, affect the operations, performance, business strategy and results of the accounts that it manages and could cause the actual results, performance or achievements of such accounts to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements or anticipated on the basis of historical trends.

INDEX DISCLOSURE

The below are widely used indices that have been selected for comparison purposes only. Indices are unmanaged, and one cannot invest directly in an index. Except for HFR indices, which do reflect fees and expenses, the indices do not reflect any fees, expenses or sales charges. Unlike most asset class indices, hedge fund indices included in this presentation have limitations, which should be considered in connection with their use in this presentation. These limitations include survivorship bias (the returns of the indices may not be representative of all the hedge funds in the universe because of the tendency of lower performing funds to leave the index); heterogeneity (not all hedge funds are alike or comparable to one another, and the index may not accurately reflect the performance of a described style); and limited data (many hedge funds do not report to indices, and the index may omit funds which could significantly affect the performance shown; these indices are based on information self-reported by hedge fund managers which may decide at any time whether or not they want to continue to provide information to the index). These indices may not be complete or accurate representations of the hedge fund universe and may be affected by the biases described above.

BLOOMBERG GLOBAL AGGREGATE INDEX: The Bloomberg Global Aggregate Index is a broad-based market capitalization weighted measure of the global investment grade fixed-rate debt markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: The US Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, MXN, ZAR, ILS and TRY).

BLOOMBERG US AGGREGATE BOND INDEX: The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, fixed rate agency MBS, ABS and CMBS (agency and non-agency).

HFRI MACRO INDEX: The HFRI Macro Index is a sub-index of the HFRI Fund Weighted Composite Index and is composite index of over 900 Investment Managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets.

MSCI WORLD INDEX: A market cap weighted stock market index of 1,652 global stocks and is used as a common benchmark for ‘world’ or ‘global’ stock funds. The index includes a collection of stocks of all the developed markets in the world, as defined by MSCI. The index includes securities from 23 countries but excludes stocks from emerging and frontier economies.

S&P 500 TOTAL RETURN INDEX: An unmanaged, market value-weighted index measuring the performance of 500 U.S. stocks chosen for market size, liquidity, and industry group representation. Includes the reinvestment of dividends. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

60/40 PORTFOLIO or GLOBAL 60/40 PORTFOLIO: Reflects a hypothetical portfolio with a 60% allocation to equities and a 40% allocation to bonds as represented by the MSCI World Index and the Bloomberg Global Aggregate Index, rebalanced monthly. Performance of the underlying stock and bond indices is calculated on a gross basis. This is a hypothetical composite portfolio that is not investable. Please refer to important disclosures at the end of this document regarding hypothetical performance.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Stocks and bonds are represented by the MSCI World Index and the Bloomberg Global Aggregate Index, respectively, unless otherwise noted.

What’s Next for Quant: CAASA’s Primer Featuring Thomas Feng, Ph.D., Chief Investment Officer – Quant Strategies

Posted on November 18, 2024January 21, 2025 by emessina

In the latest publication by the Canadian Association of Alternative Strategies & Assets (CAASA), What’s Next for Quant, Graham’s Chief Investment Officer – Quant Strategies, Thomas Feng, Ph.D., joins industry experts to demystify quantitative investing.

This insightful paper examines how quantitative strategies offer investors non-correlated, liquid alternatives that seek to enhance portfolio performance. It explores benefits, challenges, and adaptive nature of quantitative strategies in the current market. From reducing human bias and enhancing consistency in decision-making to employing cutting-edge technology, discover how quant funds are evolving to meet the needs of modern portfolios.

Read the Full Quant Primer

Thomas Feng, Ph.D.

Chief Investment Officer – Quant Strategies

Thomas Feng, Ph.D., is Chief Investment Officer – Quant Strategies of Graham. He is currently responsible for the management and oversight of the firm’s Quantitative Strategies team, including the Quantitative Operations and Execution, Research, and Data Science teams. Dr. Feng is also a member of the firm’s Investment and Risk committees. He became an Associated Person of Graham effective February 7, 2013 and a Principal on April 30, 2014. Dr. Feng joined Graham in April 2009 as a portfolio manager/quantitative research analyst. Prior to joining Graham in April 2009, Dr. Feng was part of a portfolio management team trading quantitative strategies at Fortress. From 1997 to 2006, Dr. Feng held roles of increasing responsibility, including Managing Director of Interest Rate Derivatives Research and Managing Director of Quantitative Proprietary Trading, at RBS Greenwich Capital. Dr. Feng received a Ph.D. in Mathematics from Princeton University in June 1997 and a B.S. in Mathematics from Yale in May 1993.

About CAASA
The Canadian Association of Alternative Strategies & Assets (CAASA) was formed to bring together alternative investment managers, service providers and investors in a conducive environment for collaboration while engaging investors to be a strong part of the conversation.

IMPORTANT DISCLOSURE

Interpreting Correlation

Posted on September 20, 2024January 16, 2025 by emessina

Correlation is one of the most widely used measures of diversification and can be a helpful statistical indicator for investors looking to construct a diversified portfolio. However, there are complexities in analyzing correlation and investors should use caution in interpreting it. Here, we highlight a few of these complexities. Ultimately, rather than passively combining assets with low correlation to achieve diversification, investors should use a range of measures to actively analyze diversification. Investors can seek strategies that demonstrate dynamic diversification and are structurally designed to perform differently in different market conditions.

NON-CORRELATION DOES NOT IMPLY INDEPENDENCE

If two variables are independent, then their correlation will be 0. However, it doesn’t go the other way. A correlation of 0 does not imply independence. In the example (right), while y is fully determined by x, the linear correlation between the two, measured by the slope of the best fit, is zero. As shown below, there are many paths that can lead to a given correlation, and even assets with zero correlation can have a clear relationship.

Correlation is (usually) linear¹

Examples of non-correlated series

Correlation = 0 for each of the above examples²

CORRELATION IGNORES THE MEAN

Two price series that are highly correlated may move in different directions due to different average returns and vice versa. This means that while the relative movements of the prices might be similar, their absolute levels can diverge significantly over time. For instance, if one asset consistently grows at a faster rate than the other, their price paths can separate despite a high correlation. This divergence underscores the importance of considering both correlation and average returns when analyzing and forecasting price movements. Therefore, solely relying on correlation without accounting for the mean can lead to misleading conclusions about the relationship between two price series.

Two highly correlated assets moving in different directions…¹

Correlation = 0.8

Two uncorrelated assets moving in the same direction…¹

Correlation = 0

CORRELATION ≠ CAUSATION

Causation means that one event causes another event to occur. Correlation means there is a relationship or pattern between the values of two variables. However, even if the historical correlation is +1, this does not mean that the asset prices will move the same way in the future. It only means that they have done so in the past.

CORRELATIONS CHANGE OVER TIME

Correlations can change dynamically over time and fluctuate during short- or long-term periods. For example, while negative stock/bond correlation has been the bedrock of many asset allocation strategies since 2000, over a longer time frame there have been prolonged periods where stock/bond correlation was positive. In addition, in periods of high market volatility, shorter-term market correlations tend to move toward a positive coefficient.

Correlations Change: Sometimes slowly…

Sometimes abruptly…

CORRELATIONS MAY BE CONDITIONAL ON THE MARKET ENVIRONMENT

Sometimes asset owners face the worst of all worlds – portfolio diversifiers that are only uncorrelated with their core portfolio in normal market conditions, but become correlated when most needed, when the core is under stress. Conditional correlation may reveal that strategies with high or low overall correlation may behave very differently in down markets (when diversification is needed most):

An example of conditional correlation¹

THE IMPORTANCE OF DYNAMIC DIVERSIFICATION

Rather than relying solely on historical correlations, investors should use a variety of metrics to analyze portfolio diversification. As market dynamics continually change, strategies that can dynamically manage portfolio diversification and risk when market correlations increase will continue to be important when constructing a portfolio resilient to changing market conditions. By adopting strategies that offer structural diversification to markets and can adapt to changing market conditions, investors can better navigate uncertain environments and achieve more stable long-term returns.

REFERENCES

¹ C. Jones, N. Bethke, and E. Tricker. Contemplating Correlation Research Note, Graham Capital Management, May 2021.

² https://www.analyticsvidhya.com/

³ https://www.tylervigen.com/spurious-correlations

IMPORTANT DISCLOSURE

Source of data: Graham Capital Management (“Graham”), unless otherwise stated

Resilient Strategies: Tailwinds in Left-Tail Scenarios

Posted on June 3, 2024December 5, 2024 by emessina

In a rapidly changing financial landscape, understanding how to navigate market tail risk is paramount. In a recent presentation, Pablo Calderini, President and Chief Investment Officer at Graham, delves into ‘Resilient Strategies: Tailwinds in Left-Tail Scenarios.’ Pablo provides insights into the global macro investment landscape, including tail risks in the current market environment, pathways to portfolio resilience in the face of adverse geopolitical events and macro turbulence, and the crucial role of portfolio diversification.

Watch Live Recording

Presenter
Pablo Calderini
President and CIO

Pablo E. Calderini is the President and Chief Investment Officer of Graham Capital Management, L.P. (“Graham”) and is responsible for the management and oversight of the discretionary and systematic trading businesses at Graham. Mr. Calderini is also a member of the firm’s Executive, Investment, Risk, and Compliance committees. He joined Graham in August 2010. Prior to joining Graham, Mr. Calderini worked at Deutsche Bank from June 1997 to July 2010 where he managed several business platforms including Equity Proprietary Trading, Emerging Markets, and Credit Derivatives. Mr. Calderini received a B.A. in Economics from Universidad Nacional de Rosario in 1987 and a Masters in Economics from Universidad del CEMA in 1989, each in Argentina.

IMPORTANT DISCLOSURE

This presentation is neither an offer to sell nor a solicitation of any offer to buy shares in any fund managed by Graham and should not be relied on in making any investment decision. Any offering is made only pursuant to the relevant prospectus, together with the current financial statements of the relevant fund and the relevant subscription documents all of which must be read in their entirety. No offer to purchase shares will be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation. The shares have not and will not be registered for sale, and there will be no public offering of the shares. No offer to sell (or solicitation of an offer to buy) will be made in any jurisdiction in which such offer or solicitation would be unlawful. No representation is given that any statements made in this document are correct or that objectives will be achieved. This document may contain opinions of Graham and such opinions are subject to change without notice. Information provided about positions, if any, and attributable performance is intended to provide a balanced commentary, with examples of both profitable and loss-making positions, however this cannot be guaranteed.

Global Macro Primer

Posted on April 3, 2024October 2, 2024 by lkarpinski

INTRODUCTION

In the alternative investment industry, few strategies capture the breadth and complexity of global markets quite like global macro investing. At its core, global macro is not merely a single investment approach but a comprehensive strategy that seeks to capitalize on broad economic trends and geopolitical developments across the globe. With a focus on understanding and predicting macroeconomic variables such as interest rates, fluctuations in currencies, commodities, credit and equities, along with geopolitical events, global macro managers aim to generate returns by strategically positioning their portfolios to profit from both anticipated and unforeseen shifts in the global landscape. Global macro has demonstrated its ability to perform independently from other asset classes and withstand shifting market dynamics, making it an integral component of a well-diversified portfolio. In this primer, we’ll explore this strategy’s fundamental principles, key performance and investment characteristics, and the role global macro can play in building more resilient investment portfolios.

WHAT IS GLOBAL MACRO?

Global macro is an alternative investment strategy that seeks to profit from fundamental analysis of a range of macroeconomic variables and their potential impact on global markets. Trading is dynamic, with trading themes typically ranging from days to weeks, and positions adjusting as the macro environment changes. Macro offers the potential to provide meaningful diversification and profit opportunities due to its ability to go long or short a diverse market universe and flexibility in trading. The broad spectrum of markets traded have historically resulted in low overall correlation to traditional assets such as stocks and bonds.

Diverse Market Universe

Global macro strategies are broadly diversified by geography and sector. Many macro portfolio managers trade across global currency, fixed income, equity, commodity, and credit markets, with some focused on specific sectors. Common specialties include fixed income relative value, emerging market, or commodity trading. Although macro portfolios tend to trade liquid instruments, they also have the flexibility to trade individual securities and a range of derivatives. This flexibility allows the implementation of more nuanced investment ideas than what may be seen with other strategies.

Markets traded typically include, but are not limited to:

Investor Liquidity

Given the generally liquid nature of the underlying markets and instruments traded, global macro strategies typically do not borrow money or rely on external funding, which is a form of leverage often employed by other hedge fund styles. Leverage for global macro funds tends to be limited to the margin required to trade derivatives. Consequently, global macro funds often have more favorable redemption terms than other alternatives employing less liquid strategies. It’s not uncommon for global macro funds to offer quarterly redemption liquidity or better, with no lock-ups or gates, depending on the specific implementation used (e.g., discretionary versus quantitative or private fund versus ’40 Act or UCITS).

*In recent years, multi-strategy funds have increasingly adopted longer redemption terms, gates, hard/soft lock-up periods, or other mechanisms, which vary significantly among managers and lack standardization, thus falling into the two categories outlined above.

TRADING APPROACHES

Due to their broad investment mandate, the global macro peer group demonstrates significant heterogeneity in both trading approaches and the returns produced by managers.

Single and Multi-Portfolio Manager Funds

Macro managers may adopt either a single- or multi-portfolio manager (“PM”) macro approach. Single-PM approaches carry concentrated risk and potential for higher returns but increase vulnerability to individual PM views and market disruptions. Multi-PM macro funds diversify risk across multiple strategies, leveraging diverse expertise to reduce downside risk and improve portfolio Sharpe ratio. Success in multi-PM funds often relies on effective portfolio construction techniques, such as position overlap analysis, correlation matrices, and robust risk management rather than outsized returns of individual components. For instance, a hypothetical portfolio of 10 uncorrelated strategies, each with a standalone Sharpe ratio of 0.5, would yield a portfolio-level Sharpe ratio of 1.6, all else being equal (as outlined in Graham’s Insight Series, Diversify and Conquer). Multi-PM macro platforms aim for consistent performance by spreading risk among multiple managers and strategies.

Hypothetical Relationship between Number of Components and Sharpe Ratio

As components are added, the Portfolio Sharpe ratio increases as it can benefit from uncorrelated return sources. However, there is a limit where additional components may not improve performance as correlations increase and the diversification benefit to the portfolio deteriorates.

Quantitative and Discretionary Macro

Two prominent global macro trading styles are quantitative (systematic) and discretionary. Both analyze fundamental macroeconomic indicators to forecast shifts in market prices; however, they do so in different ways and each offers its own advantages. Quantitative approaches employ algorithms to analyze data and generate position signals, while discretionary approaches rely on human insight and subjective decision-making. Quantitative macro can excel in handling vast datasets within stable and transparent markets, while discretionary macro can adeptly navigate unprecedented or specialized themes, particularly in scenarios where data is more fragile or elusive. Over time these two styles have had low correlation to each other.

GENERIC TRADE EXAMPLE

Global macro trading can capitalize on a variety of macroeconomic themes across a broad market universe. A classic example often revolves around yield curve dynamics, where managers may exploit changes in the yield curve’s shape by capitalizing on the spread between short- and long-term rates.

Trading the Yield Curve Spread

Bull Steepener

→ Common trade during periods of monetary easing

The yield curve steepens either from long-term rates rising faster than short-term rates (bear steepener) or from short-term rates falling faster than long-term rates (bull steepener). When traders expect the yield curve to steepen they will go long short-term bonds and short long-term bonds. As the difference between rates widens, the trader should earn more on the short-term bonds they bought than they lose on the long-term bonds they sold.

Bear Flattener

→ Common trade during periods of monetary tightening

The yield curve flattens either from long-term rates falling faster than short-term rates (bull flattener) or from short-term rates rising faster than long-term rates (bear flattener). When traders expect a flattener, they will sell short-term bonds and buy long-term bonds. As the difference between rates narrows, the trader should earn more from the short-term bonds they sold short, than they lose on the long-term bonds they bought.

DIVERSIFICATION BENEFITS OF MACRO

The “Go Anywhere” Strategy

At its core, global macro is a dynamic and tactical strategy that can adapt to a variety of market conditions. The strategy is not reliant on any one market regime, but rather may benefit from economic growth or contraction, inflationary or deflationary environments, or bullish or bearish equity. The strategy is expected to continue to add value to a diversified investment portfolio over the long run whether or not any of these scenarios emerge. The strategy’s ability to navigate diverse market conditions underscores its role as a diversifier within an investment portfolio.

Performance in Rising/Falling Equity Markets

Based on monthly performance, Jan-90 to Dec-23
Data Source: eVestment, HFR, Inc; Chart by Graham Capital Management, L.P.
Both Macro and Trend-Following are well-known diversifiers within a portfolio, as demonstrated above, but they achieve this diversification in different ways and have different – albeit complementary – return profiles, as shown within the ensuing “Summary Statistics” table. While these details fall beyond the scope of this paper, please refer to Graham’s Trend Following Primer for additional information.

Nevertheless, certain market contexts have proven to be more favorable for global macro than others. Macro returns strongly correspond to sustained directional moves in markets. Macro performs well during periods of strong market directionality (often when there is a clear catalyst for market shifts). Shorter-term market volatility that often results in choppy, range-bound markets may be more challenging for the strategy.

For example, market events or significant policy changes often provide ample opportunities for global macro funds, as these macroeconomic factors drive market volatility, as seen during events like the burst of the technology bubble in the early 2000s, the Global Financial Crisis of 2008, and the inflation surge in 2022. In periods of stable interest rates and limited macroeconomic volatility, macroeconomic factors may have less impact on market movements, which can reduce trading opportunities and result in more muted returns. Macro strategies are also not immune to unexpected market disruptions, as shown by events like the “Taper Tantrum” of May 2013 and the Silicon Valley Bank collapse in March 2023.

Low Correlation to Stocks and Bonds

Macro is an uncorrelated, diversifying strategy. The strategy has no persistent long or short bias toward any market and low overall correlation to equities and bonds. Macro can exhibit low to negative correlation to equity and bond indices during periods when the index performs poorly, and low to positive correlation during periods when the index performs well. As a result, macro can perform well during both bull and bear markets.

Table of Correlation of HFRI Macro Index to MSCI World, S&P, Bloomberg Global Aggregate, Bloomberg US Aggregate

Jan-90 to Dec-23
Data Source: eVestment, HFR, Inc.

Dynamic Diversification: Conditional Correlation to Equities

Rolling Correlation of HFRI Macro Index to Equities versus Equity Index Returns
24 month rolling window, Jan-90 to Dec-23
Data Source: eVestment, HFR, Inc. Chart by Graham Capital Management, L.P.

Potential to Mitigate Equity Risk

Global macro has the potential to flourish at times of big dislocations and has historically performed well, on average, during equity sell-offs. For example, as mentioned previously, macro managers were broadly successful during longer-term market declines such as the burst of the technology bubble in the early 2000s, the 2008 Global Financial Crisis, and the 2022 inflationary market environment, as they were able to capitalize on strong market directionality and fundamental catalysts. However, positive performance during equity downturns is not guaranteed and macro should not be thought of exclusively as a portfolio hedge, but rather as a low correlation, diversifying asset over the long-term. For example, sharp reversals and short-term declines can be challenging, as seen in Q1 2020.

Global Macro Performance during Largest 5 Equity Drawdowns (Peak to Trough)

Since HFRI Macro Index Inception, Jan-90 to Dec-23
Data Source: eVestment, HFR, Inc. Chart by Graham Capital Management, L.P.

2022 Case Study

Many investors seek diversification through alternative strategies. However, diversification benefits vary significantly across styles, and many strategies have positive correlation during equity down markets. In 2022, markets experienced a trifecta of a selloff in equity and bond markets, elevated inflation, and increased market volatility, making it a difficult year for many investors. Amid the resultant dispersion in alternative investment styles, global macro and trend-following strategies emerged as notable winners in 2022.

Data Source: eVestment, HFR, Inc. Chart by Graham Capital Management, L.P.

PERFORMANCE CHARACTERISTICS OF MACRO

The dynamic diversification features inherent in global macro strategies offer the potential for substantial alpha generation, especially during equity market downturns when diversification and returns uncorrelated to market beta are most crucial. This makes it an attractive complement to a traditional portfolio.

Summary Statistics: Significant Alpha Relative to Other Alternatives

Since HFRI Macro Index Inception, Jan-90 to Dec-23
Data Source: eVestment, HFR, Inc. Chart by Graham Capital Management, L.P.
Hedge Fund styles are based on net performance of each respective HFRI Index from HFRI Macro index Inception in January 1990 to present, with the exception of the HFRI Trend Following Index and the HFRI Credit Index, which commence in January 2008.

Positive Skew

Macro tends to exhibit a positively skewed performance distribution. Positive skew is desirable because the strategy tends to exhibit more positive extremes than negative, with potentially many instances of smaller return periods in between. These positive extremes often occur when there are clear catalysts for directional market moves (which can be either bullish or bearish) and offer the potential to offset drawdowns elsewhere in a portfolio. In other words, macro can be a big contributor when the portfolio is under stress, and may not be a big drag during periods when the portfolio is performing well. This is true dynamic diversification.

Distribution of Returns

Distribution of Monthly Returns: Macro, Hedge Funds, 60/40 Portfolio

Since HFRI Macro Index Inception, Jan-90 to Dec-23; Macro and Hedge Funds are represented by the HFRI Macro Index and the HFRI Fund Weighted Composite Index, respectively.
Data Source: eVestment, HFR, Inc. Chart by Graham Capital Management, L.P.

ROLE WITHIN AN INVESTMENT PORTFOLIO

Allocating to global macro as a long-term, strategic allocation within a diversified investment portfolio offers the potential for significant benefits and can be a valuable portfolio construction tool. Global macro offers the potential to lower the volatility and soften the drawdowns of a broader investment portfolio while adding to returns over the long run. Importantly, the strategy is meant to complement – rather than compete with – traditional investments.

Potential Impact of Allocating to Global Macro

Since HFRI Macro Index Inception, Jan-90 to Dec-23
Global 60/40 Portfolio, Global 60/40 Portfolio with 10% HFRI Macro, and Global 60/40 Portfolio with 20% HFRI Macro are a hypothetical composite portfolios that are not investable. Please refer to important disclosures at the end of this presentation for details on how these portfolios were constructed and for important information regarding hypothetical performance.
Data Source: eVestment, HFR, Inc. Chart by Graham Capital Management, L.P.

IMPORTANT DISCLOSURE

Source of data: Graham Capital Management (“Graham”), unless otherwise stated

INDEX DISCLOSURE

HFRI TREND FOLLOWING DIRECTIONAL INDEX: The HFRI Trend Following Directional Index is a global, equal-weighted index of single-manager funds that report to the HFR Database. The HFRI Trend Following Directional Index is comprised of funds that employ trend following strategies such as Macro: Currency – Systematic, Macro: Systematic Diversified, certain Macro: Multi-Strategy funds and other Macro funds that utilize, to some degree, trend following.

HFRI RELATIVE VALUE INDEX: Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. RV position may be involved in corporate transactions also, but as opposed to ED exposures, the investment thesis is predicated on realization of a pricing discrepancy between related securities, as opposed to the outcome of the corporate transaction.

HFRI EMERGING MARKETS INDEX: Emerging Markets funds invest, primarily long, in securities of companies or the sovereign debt of developing or ’emerging’ countries. Emerging Markets regions include Africa, Asia ex-Japan, Latin America, the Middle East and Russia/Eastern Europe. Emerging Markets – Global funds will shift their weightings among these regions according to market conditions and manager perspectives.

HFRI EVENT DRIVEN INDEX: Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure.

HFRI CREDIT INDEX: HFRI Credit Index is a composite index of strategies trading primarily in credit markets. It is an aggregation of following 7 HFRI substrategy indices. HFRI ED: Credit Arbitrage Index, HFRI ED: Distressed/Restructuring Index, HFRI ED: Multi-Strategy Index, HFRI RV: Fixed Income-Asset Backed Index, HFRI RV: Fixed Income-Convertible Arbitrage Index, HFRI RV: Fixed Income-Corporate Index, and HFRI RV: Multi-Strategy Index.

HFRI EQUITY HEDGE INDEX: Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities, both long and short.

HFRI HEDGE FUND COMPOSITE INDEX: The HFRI Fund Weighted Composite Index is a global, equal-weighted index of single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or $10 Million under management and a twelve (12) month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds.

GLOBAL 60/40 PORTFOLIO WITH 10% HFRI MACRO: Reflects a hypothetical portfolio with a 54% allocation to equities as represented by the MSCI World Index, a 36% allocation to bonds as represented by the Bloomberg Global Aggregate Index, and a 10% allocation to Macro as represented by the HFRI Macro Index, rebalanced monthly. Performance of the underlying stock and bond indices is calculated on a gross basis. This is a hypothetical composite portfolio that is not investable. Please refer to important disclosures at the end of this document regarding hypothetical performance.

GLOBAL 60/40 PORTFOLIO WITH 20% HFRI MACRO: Reflects a hypothetical portfolio with a 48% allocation to equities as represented by the MSCI World Index, a 32% allocation to bonds as represented by the Bloomberg Global Aggregate Index, and a 20% allocation to Macro as represented by the HFRI Macro Index, rebalanced monthly. Performance of the underlying stock and bond indices is calculated on a gross basis. This is a hypothetical composite portfolio that is not investable. Please refer to important disclosures at the end of this document regarding hypothetical performance.

Stocks and bonds are represented by the MSCI World Index and the Bloomberg Global Aggregate Index, respectively, unless otherwise noted.

Market Diversification

Posted on December 20, 2023January 16, 2025 by lana.brkic

ABSTRACT

Portfolio diversification is one of the most important and sought-after concepts in investing. A properly diversified portfolio will, on average, produce higher risk-adjusted returns than any single market investment, and has the potential to protect against drawdown exposure. However, due to market correlations, most investors realize a performance plateau, limiting the benefits of expanding a portfolio with additional markets. This market correlation structure can often make it difficult to achieve diversification.

1. INTRODUCTION

Markowitz was awarded the Nobel Prize in Economics in 1990 for his work on the theory of portfolio choice, first published in an essay entitled Portfolio Selection (Markowitz, 1952), and later, more extensively, in his book, Portfolio Selection: Efficient Diversification (Markowitz, 1959). This theory “analyzes how wealth can be optimally invested in assets which differ in regard to their expected return and risk”. Markowitz demonstrated that an investor can reduce overall levels of portfolio risk by investing in assets that are not perfectly correlated, in other words, by holding a diversified portfolio of assets.

Diversification is both observed and sensible; a rule
of behavior which does not imply the superiority of
diversification must be rejected both as a hypothesis
and as a maxim. (Markowitz, 1952)

Diversification has the potential to significantly improve portfolio returns and running a balanced and diverse portfolio is a goal of many investment strategies. However, the actual improvement an investor can expect to realize can be limited by a number of factors. In this brief paper we examine both the theoretical benefits of diversification as well as some of its practical limitations for strategies such as trend-following.

2. WHY DIVERSIFICATION IS IMPORTANT

To illustrate how diversification can add value to a portfolio we can construct a simple simulation. We begin with a portfolio of 10 “assets”, each alone having modest performance (averaging a Sharpe ratio¹ of 0.2). Using these 10 assets as building blocks, we can construct a simple equally weighted portfolio. Illustrated by the red line in Figure 1(a), we see that the portfolio has better performance (risk-adjusted returns) than any of its constituents. This is because we receive a diversification benefit, essentially “smoothing out” the returns of the portfolio. As the market universe is expanded, further improvement in risk-adjusted returns is served (Figure 1(b)-1(c)) as we receive additional diversification benefit.

These results, while impressive, come with a significant caveat. The assets used in this simulation have, to this point, been uncorrelated to one another. If instead, we introduce a small amount of correlation (for example 10%) we observe a drastic reduction in performance. Figure 1(d) illustrates the impact of introducing correlation into the simulation by comparing the returns of uncorrelated markets (green line) and returns given a 10% correlation (red line). This simulation demonstrates that while diversification can significantly improve a portfolio of even modest constituents, it also demonstrates potential limits to this improvement due to market correlation.

Real markets are rarely uncorrelated. Markets, especially those within the same sector (e.g. fixed income, equities, etc.), often exhibit persistent positive correlations, and can move in the same direction at the same time. For example, the Dow Jones Industrial Average and the S&P 500 typically make or lose money on the same day (they have been 96% correlated for the past 20 years).

A convenient way to graphically represent correlations is to use a heatmap where colors are used to show the degree of correlation among assets. We provide some examples in Figure 1, which represent correlations between over 50 different macro assets. Figure 1(e) is characteristic of a more conventional market structure. We see relatively strong correlations (red hues) within sectors (e.g., stocks were positively correlated with other stocks), but relatively low correlations (blue hues) across sectors (e.g., stocks had low correlation with bonds at that time). However, correlations are rarely static for long. For example, during a period of market stress, such as initiations of the Fed’s quantitative easing (QE) policy, we observe strong alignment of markets and significant positive correlations both within and between sectors (Figure 1(f)). When these periods occur, the number of different assets held may provide less diversification than one hoped, regardless of the number of assets in the portfolio.

Figure 1. Adding uncorrelated assets increases portfolio diversification as noted with (a) 10 assets, (b) 50 assets, and (c) 100 assets. However, if there is a slight correlation (10%) then benefits of diversification are not as pronounced, with cumulative returns decreasing from the green line to the red line (d). However, the correlation across markets is dynamic, and can shift dramatically depending on the environment. In the heatmaps (e) and (f) red colors indicate a positive correlation (markets move together) and blue hues would indicate a negative correlation

2.1 IMPACT OF TREND FOLLOWING

As demonstrated in our previous simulation, diversification has the power to significantly enhance portfolio returns, but correlation can limit that enhancement. We have also observed that markets can exhibit significant positive correlation to one another, which is a important consideration when constructing a portfolio. There is an elegant mathematical result to outline the diversification benefit one should expect when adding markets to a portfolio.

We begin with a key statistical relationship: for a group of variables, the variance of their sum is equal to the sum of their covariances.

For our purposes, suppose we consider an equally weighted portfolio of n assets, X_i,

If we consider the case where the assets have equal risk (σ), and an average correlation of ρ (which is precisely the case we defined for our initial simulations), then equation (1), simplifies to:

Assuming a constant risk, as the number of assets get larger, the first term will become increasingly small and the second term will approach 1, thus we see asymptotic convergence:

If the markets are uncorrelated with ρ = 0, then Var(X¯) tends to 0, which leads to an increase in risk adjusted performance. If however, ρ > 0, after a certain point, as the number of assets within the portfolio continues to increase, the added benefit received becomes increasingly small, creating a ceiling effect.

We can demonstrate this effect in practice by simulating the construction of an expanding trend-following portfolio. We used the SG Trend Indicator² to construct portfolios of increasing size, starting with a few of the most liquid markets and continuing to add markets in order of liquidity.

Initially, performance improves as the market universe increases (Figure 2), similar to the results observed earlier in our simulations. However, once the portfolio has reached between 40-60 markets, performance appears to saturate and there is little further improvement to be gained.

The reason for this lack of additional performance benefit is that simply adding markets does not necessarily lead to an increase in diversification. To visualize this, we observe in Figure 3, the correlation structure remains the same regardless of the number of markets added, suggesting that additional markets do not guarantee additional diversification.

Figure 2. As markets are added to a portfolio, the Sharpe ratio (y-axis) increases until approximately 50 markets have been added (x-axis), at which point, there is a performance ceiling such that adding additional markets does not provide additional performance.

Figure 3. Even though the number of markets included in the portfolio has more than doubled from (a) to (c), the correlation structures between the portfolios are virtually identical, suggesting that while adding additional markets may expand the portfolio, it does not necessarily add diversification.

3. CONCLUSIONS

Markowitz’s theory on portfolio construction and diversification rests on the concept that the level of risk in a portfolio can be reduced through the addition of assets that are not perfectly correlated. As a result one should expect to see improvement in risk adjusted returns. However, few markets move independently of one another and correlations between markets can be persistently high. As a result material diversification can be difficult to achieve. In particular, simply increasing the asset universe does not necessarily manifest in greater opportunities for diversification.

¹The Sharpe ratio is used to analyze return while allowing for risk, and is defined as the average return divided by the standard deviation of return.

²We use the SG Trend Indicator, which is a market-based performance indicator designed to have a high and stable correlation to the returns of trend following CTA strategies. At its core, it uses a (20,120) moving average trading signal. For more details see https://cib.societegenerale.com/fileadmin/indices_feeds/SG_Trend_Indicator_Methodology_Summary.pdf

REFERENCES

H. Markowitz. Portfolio selection. The Journal of Finance, 7(1): 77–91, 1952.
H. Markowitz. Portfolio selection: efficient diversification of investments. Cowles foundation for research in economics at Yale university. Monograph. Wiley, 1959

LEGAL DISCLAIMER

THIS DOCUMENT IS NOT A PRIVATE OFFERING MEMORANDUM AND DOES NOT CONSTITUTE AN OFFER TO SELL, NOR IS IT A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF THE AUTHORS AND DO NOT NECESSARILY REPRESENT THE VIEWS OF GRAHAM CAPITAL MANAGEMENT. THE INFORMATION CONTAINED HEREIN IS NOT INTENDED TO PROVIDE ACCOUNTING, LEGAL, OR TAX ADVICE AND SHOULD NOT BE RELIED ON FOR INVESTMENT DECISION MAKING.

Diversify and Conquer: Enhancing Portfolio Returns through Non-Correlated Strategies

Posted on October 2, 2023November 23, 2023 by lana.brkic

For some investors, it is tempting to construct a portfolio consisting only of high Sharpe, high-performing strategies. However, focusing solely on the return characteristics and Sharpe ratios of individual strategies, without considering their role within a broader portfolio, can increase the risk of amplified losses in volatile markets. Rather than trading in-and-out of “winners,” investors are generally better served by constructing a well-diversified portfolio of low-correlated strategies. With thoughtful portfolio construction, investors can potentially achieve significantly better returns at the portfolio level than can be expected from the individual component strategies. By prioritizing diversification over the pursuit of individual winners, investors can strengthen their chances of preserving capital and achieve more consistent returns.

IMPORTANT DISCLOSURE

Source of data: Graham Capital Management (“Graham”), unless otherwise stated

Trend-Following Primer

Posted on August 9, 2023April 2, 2024 by matt.peacock

OVERVIEW OF TREND-FOLLOWING

With more than $300 billion in assets under management¹, trend-following is one of the largest alternative investment strategies and has become a common allocation in many individual and institutional investment portfolios. Trend-following has historically demonstrated low correlation to traditional investments such as stocks and bonds as well as other alternatives and has the potential to perform well in both rising and falling markets, including equity crisis periods. The strategy is widely regarded as an effective diversifier within an investment portfolio. Here, we outline some of the basic characteristics of trend-following and how it can impact a broader investment portfolio.

WHAT IS TREND-FOLLOWING?

Trend-following strategies use a systematic process, whereby algorithmic models seek to identify price trends in markets, with the expectation that upward trending markets may continue to rally and downward trending markets may continue to decline. These strategies take long positions in positively trending markets and short positions in negatively trending markets, using indicators based on price and volatility of the underlying assets to identify trends of various lengths. Trend followers seek to run diverse portfolios, typically trading liquid, centrally-cleared futures and currency markets, with the number of markets potentially ranging from tens to hundreds. These strategies often target consistent volatility within a predetermined range and try to preserve upside potential and limit downside risk by running with winners and cutting losing positions.

HOW TRENDS ARE IDENTIFIED

TYPES OF TREND-FOLLOWING MODELS

Moving average and breakout models are two prominent strategies used by most trend-followers for initial signal generation. While these models may be parameterized differently, the raw signals generated are often highly correlated over time because of their common dependence on past prices.

For example, while trend-following models may be parameterized at different speeds, no single speed is optimal over the long-term: if markets are more range-bound, then faster trend-followers tend to perform better as they are better able to capitalize on short-term oscillations in the price. By the opposite argument, in prolonged trends, slower trend-following is advantageous.

Beyond signal generation and trend identification, position sizing and adjustment, risk management, and portfolio construction are important differentiators between trend-following managers.

Examples of Traditional Trend-Following Models

BREAKOUT MODELS

These models compare the current price with a threshold to signal a long, short, or no position. The threshold is determined by either a “price breakout” – a past maximum or minimum price – or a “channel breakout” – a past price at a given lookback and trading range.

MOVING AVERAGE MODELS

These models use moving averages of past prices to generate a trading signal. The difference between two moving averages, a “fast” and a “slow” one, determines a long or a short position. A crossover between the two will signal a trend reversal.

THEORETICAL FOUNDATION: WHY DO MARKETS TREND?

Trend-following performance depends on the existence of trends, or sustained directional moves in markets. Trends may exist both in times of market duress such as the 2008 financial crisis, or during relatively “normal” market environments. The theoretical rationale surrounding the existence of trends includes:

KEY CHARACTERISTICS OF TREND-FOLLOWING

FAVORABLE INVESTMENT STRUCTURE

Trend-following strategies are available through liquid investment vehicles – including managed accounts, UCITS and ‘40Act (Mutual Fund) structures – with daily, weekly or monthly liquidity without lockups, gates or other constraints. Because the market universe is liquid and the rules-based investment approach is scalable, many trend-following funds are also available through registered vehicles, such as mutual funds and UCITS. These formats often translate to a high degree of transparency, including position-level reporting, and competitive fee structures.

NON-CORRELATED RETURNS²

Over the long-term, trend-following has had low or even negative correlation to other investments. Trend-following strategies also tend to exhibit negative downside correlation to equity markets, providing the potential to perform well during periods of sustained stress in global equity markets. At any point in time, however, correlations may be positive or negative, including during crisis conditions. Therefore, trend-following strategies should not be treated exclusively as a portfolio hedge; rather, they may be viewed as additional sources of uncorrelated returns over intermediate to longer-term time periods.

NO STRUCTURAL LONG OR SHORT BIAS²

Non-correlation does not mean negative correlation. No structural long or short bias means that correlations may be positive or negative over different time horizons. Trend-following can perform well during both market rallies and during periods of negatively trending markets. On average, trend-following has no correlation to the markets that it trades and typically has positive correlation when markets move higher and negative correlation when markets decline.

ABILITY TO PERFORM WELL DURING EQUITY STRESS PERIODS²

Trend-following strategies can be profitable in both rising and falling markets and have a non-linear pay-off to their underlying market universe. This property is often referred to as convexity, which is a highly valued characteristic for investors seeking portfolio diversification. As shown below, trend-following exhibits strong positive convexity as it performs well during large directional moves (up or down), including equity stress periods.

As noted earlier, trend-following should not be used as a pure tail hedge. Trend-following has historically performed well, on average, during equity sell-offs, but positive performance during equity downturns is not guaranteed. For example, while trend-following was a good hedge during longer-term market declines such as the burst of the technology bubble and the Global Financial Crisis, it did not provide protection during the shorter-term equity sell-off in Q4 2018. Importantly, sharp reversals and short-term declines can be challenging for trend-following.

Trend-Following Performance During Equity Drawdowns²

Performance during 5 Worst Drawdowns for MSCI World Index

Bar chart of trend-following performance during equity drawdowns

POSITIVE LONG-TERM RETURNS²

Like all asset classes, trend-following has periods of strong, challenging, and flat performance. Even with the recent 2015-2018 drawdown in trend-following, the strategy has maintained a strong return profile over the long-term.

IMPLICATIONS FOR AN INVESTMENT PORTFOLIO²

Trend-following is a potentially valuable portfolio construction tool that has the ability to lower the volatility and soften the drawdowns of an overall portfolio while adding to returns over the long run. Importantly, trend-following returns are meant to complement – rather than compete with – traditional assets such as equities. And while it is unreasonable to expect the strategy to perform well at every discrete point in time, holding the strategy as a long-term, strategic allocation in a diversified investment portfolio offers the potential for significant benefits. As shown below, trend-following can have more modest returns in isolation, yet still offer a significant diversification benefit within an overall portfolio which serves to enhance overall returns.

IMPORTANT DISCLOSURE

REFERENCES

¹ Total AUM in Trend-Following Strategies is sourced from BarclayHedge and represents estimated assets under management for the managed futures industry utilizing AUM information provided by contributing CTA managers as of September 30, 2021.

²All data herein is based on performance since SG Trend Index inception in January 2000 through December 2021.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
DISCLOSURES AT THE END OF THIS DOCUMENT ARE AN INTEGRAL PART OF THIS DOCUMENT.

INDEX DISCLOSURE

The below are widely used indices that have been selected for comparison purposes only. Indices are unmanaged, and one cannot invest directly in an index. Except for HFR indices, which do reflect fees and expenses, the indices do not reflect any fees, expenses or sales charges. Unlike most asset class indices, hedge fund indices included in this presentation have limitations, which should be considered in connection with their use in this presentation. These limitations include survivorship bias (the returns of the indices may not be representative of all the hedge funds in the universe because of the tendency of lower performing funds to leave the index); heterogeneity (not all hedge funds are alike or comparable to one another, and the index may not accurately reflect the performance of a described style); and limited data (many hedge funds do not report to indices, and the index may omit funds which could significantly affect the performance shown; these indices are based on information self-reported by hedge fund managers which may decide at any time whether or not they want to continue to provide information to the index). These indices may not be complete or accurate representations of the hedge fund universe, and may be affected by the biases described above.

Bloomberg Global Bond Index: The Bloomberg Global Aggregate Bond Index is a broad-based market capitalization weighted measure of the global investment grade fixed-rate debt markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: The US Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, MXN, ZAR, ILS and TRY).

Bloomberg US Aggregate Bond Index: The Bloomberg US Aggregate Bond Index, formerly known as the Barclays Capital Aggregate Bond Index, is a broad based market capitalization weighted index used to represent investment grade bonds being traded in the United States. Most U.S.-traded investment grade bonds are represented. Municipal bonds and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, government agency bonds, mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in the U.S.

HFRI Fund Weighted Composite Index: The HFRI Fund Weighted Composite Index is an equal-weighted index that includes over 2000 constituent funds which have at least $50M under management or have been actively traded for at least 12 months. There are no fund of funds included in this index. All funds are reported in USD and returns are reported net of all fees on a monthly basis.

MSCI World Index: A market cap weighted stock market index of 1,652 global stocks and is used as a common benchmark for ‘world’ or ‘global’ stock funds. The index includes a collection of stocks of all the developed markets in the world, as defined by MSCI. The index includes securities from 23 countries but excludes stocks from emerging and frontier economies.

SG Trend Index: SG Trend Index is a subset of the SG CTA Index and is designed to track the 10 largest (by AUM) trend following CTAs and be representative of the trend followers in the managed futures space. Managers must meet the following criteria: must be open to new investment; must report returns on a daily basis; must be an industry recognized trend follower as determined at the discretion of the SG Index Committee; and must exhibit significant correlation to trend following peers and the SG Trend Indicator. The SG Trend Index is equally weighted, and rebalanced and reconstituted annually.

S&P 500 Total Return Index: An unmanaged, market value-weighted index measuring the performance of 500 U.S. stocks chosen for market size, liquidity, and industry group representation. Includes the reinvestment of dividends. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

Traditional 60/40 Portfolio: Reflects a portfolio with a 60% allocation to equities and a 40% allocation to bonds as represented by the MSCI World Index and the Bloomberg Barclays Global Bond Index, rebalanced monthly.

Traditional Portfolio with 10% Trend-Following: Reflects a portfolio with a 56% allocation to equities, 36% allocation to bonds, and 10% allocation to trend-following, as represented by the MSCI World Index, Bloomberg Barclays Global Bond Index, and the SG Trend Index, respectively, rebalanced monthly.

LEGAL DISCLAIMER

Source of data: Graham Capital Management (“Graham”), unless otherwise stated

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IMPORTANT DISCLOSURE

Building for the Long Run through Calm and Crisis

Top Lessons Across Market Crises

Easing, Tightening, and Everything in Between: The Role of Macro Strategies across Monetary Policy Regimes

MONETARY POLICY AS A CATALYST FOR MACRO STRATEGIES

Macro Alpha Increases with Monetary Policy ActivityJan-90 to Dec-24

Macro Alpha Increases with Monetary Policy Dispersion1Jan-00 to Dec-24

DISSECTING PERFORMANCE ACROSS RATE REGIMES

Macro Returns Across Monetary Policy RegimesJanuary 1990 to December 2024

At a Glance

Fed Easing CyclesAverage Monthly Returns

Early 2000s Dot-Com Bust and 9/11

’07-’08 Housing Market Crash and GFC

2020 Pandemic Response

Fed Hiking CyclesAverage Monthly Returns

2022-2023 Post-Pandemic Inflation Control

Periods of Fed InactivityAverage Monthly Returns, No Rate Changes in 6+ Months

A “Golden Era” for Stocks and Bonds

Cumulative Returns 6 Months Before/After Easing Cycles

Cumulative Returns 6 Months Before/After Hiking Cycles

Macro Returns and G10 Rate DispersionJanuary 2000 to December 2024

THE ROLE OF MACRO

Macro Trading Drivers

IMPORTANT DISCLOSURE

IMPORTANT DISCLOSURE

NON-CORRELATION DOES NOT IMPLY INDEPENDENCE​

Correlation is (usually) linear1

Examples of non-correlated series

CORRELATION IGNORES THE MEAN

Two highly correlated assets moving in different directions…1

Two uncorrelated assets moving in the same direction…1

CORRELATION ≠ CAUSATION

CORRELATIONS CHANGE OVER TIME

Correlations Change: Sometimes slowly…

Sometimes abruptly…

CORRELATIONS MAY BE CONDITIONAL ON THE MARKET ENVIRONMENT

An example of conditional correlation1

THE IMPORTANCE OF DYNAMIC DIVERSIFICATION

Watch Live Recording

IMPORTANT DISCLOSURE

INTRODUCTION

WHAT IS GLOBAL MACRO?​

Diverse Market Universe

Investor Liquidity

TRADING APPROACHES​

Single and Multi-Portfolio Manager Funds

Hypothetical Relationship between Number of Components and Sharpe Ratio

Quantitative and Discretionary Macro

GENERIC TRADE EXAMPLE

Trading the Yield Curve Spread

Bull Steepener

Bear Flattener

DIVERSIFICATION BENEFITS OF MACRO

The “Go Anywhere” Strategy

Performance in Rising/Falling Equity Markets

Low Correlation to Stocks and Bonds

Dynamic Diversification: Conditional Correlation to Equities

Potential to Mitigate Equity Risk

Global Macro Performance during Largest 5 Equity Drawdowns (Peak to Trough)

2022 Case Study

PERFORMANCE CHARACTERISTICS OF MACRO

Summary Statistics: Significant Alpha Relative to Other Alternatives

Positive Skew

Distribution of Returns

ROLE WITHIN AN INVESTMENT PORTFOLIO

Potential Impact of Allocating to Global Macro

OVERVIEW OF TREND-FOLLOWING

WHAT IS TREND-FOLLOWING?​

HOW TRENDS ARE IDENTIFIED​

Easing, Tightening, and Everything in Between:
The Role of Macro Strategies across Monetary Policy Regimes

Macro Alpha Increases with Monetary Policy Activity
Jan-90 to Dec-24

Macro Alpha Increases with Monetary Policy Dispersion¹
Jan-00 to Dec-24

Macro Returns Across Monetary Policy Regimes
January 1990 to December 2024

Fed Easing Cycles
Average Monthly Returns

Fed Hiking Cycles
Average Monthly Returns

Periods of Fed Inactivity
Average Monthly Returns, No Rate Changes in 6+ Months

Macro Returns and G10 Rate Dispersion
January 2000 to December 2024

NON-CORRELATION DOES NOT IMPLY INDEPENDENCE

Correlation is (usually) linear¹

Two highly correlated assets moving in different directions…¹

Two uncorrelated assets moving in the same direction…¹

An example of conditional correlation¹

WHAT IS GLOBAL MACRO?

TRADING APPROACHES

WHAT IS TREND-FOLLOWING?

HOW TRENDS ARE IDENTIFIED

TYPES OF TREND-FOLLOWING MODELS

Examples of Traditional Trend-Following Models

THEORETICAL FOUNDATION: WHY DO MARKETS TREND?

FAVORABLE INVESTMENT STRUCTURE

NON-CORRELATED RETURNS²

NO STRUCTURAL LONG OR SHORT BIAS²

ABILITY TO PERFORM WELL DURING EQUITY STRESS PERIODS²

Trend-Following Performance During Equity Drawdowns²

POSITIVE LONG-TERM RETURNS²

IMPLICATIONS FOR AN INVESTMENT PORTFOLIO²

REFERENCES

INDEX DISCLOSURE

LEGAL DISCLAIMER