Macro-Hedge

A macro-hedge is an investment technique used to mitigate or eliminate downside systemic risk from a portfolio of assets. Macro-hedging strategies typically involve using derivatives to take short positions on broad market catalysts that can negatively affect the performance of a portfolio or a specific underlying asset.

Macro-hedging requires the use of derivatives, which allows a portfolio manager to take inverse positions on targeted assets and asset categories that they believe will be significantly affected by a macro catalyst.

The macro in macro-hedge refers to risk mitigation around macroeconomic events. Therefore, macro-hedging generally requires significant foresight, extensive access to economic data and superior forecasting skills to project the expected reaction of markets and investment securities when trends occur. However, in some cases, macro-hedging positions may be easily foreseen by a series of events leading to a predetermined outcome.

In either case, macro-hedging requires substantial access to market trading platforms and the ability to utilize a variety of financial instruments in order to build sufficient market positions. Thus, macro-hedges are most often integrated by sophisticated investors and professional portfolio managers. Investors without broad market access to financial instruments used for macro-hedging strategies can turn to some of the industry’s retail offerings, commonly packaged in the form of exchange-traded funds (ETFs).

Inverse and ultra inverse ETF offerings have made macro-hedging easier for retail investors confident in their negative outlook for a particular sector or market segment. One recent example is Brexit, which caused short-term losses in many U.K. stocks and also caused a deflation of the British pound. Many investors foreseeing these losses took short positions in U.K. stocks and the British pound, which caused substantial market gains following the Brexit vote and subsequent events leading to the separation.

Other macroeconomic events that can drive macro-hedging strategies include a country’s gross domestic product expectations, inflation trends, currency movements and factors affecting commodity prices. ProShares and Direxion are two ETF providers that have developed a broad range of ETF products offered for macro-hedging. Inverse products protecting against a bearish outlook include the ProShares UltraShort FTSE Europe ETF, the ProShares UltraShort Yen ETF and the Direxion Daily Gold Miners Index Bear 3X Shares.

Macro-hedging strategies are often considered alternative investment strategies since they fall outside the realm of traditional long-only portfolios. Using derivatives creates additional risk of capital loss for a portfolio because derivative techniques require the added cost of purchasing a product that is taking a position on an underlying asset. Leverage is often used, which requires the investment to outperform its borrowing rate.

However, macro-hedging strategies can be successful when significant market movements occur. They can also be used to offset a portion of a portfolio that is likely to be affected by a macro projection. This involves taking targeted inverse bets on portions of a portfolio. It can also involve overweighting securities expected to outperform.

In November 2017, Bloomberg reported on the world’s best performing global macro hedge fund, Singapore's PruLev Global Macro Fund. The Fund reported a 47% gain by taking macro-hedge positions that benefited from President Donald Trump’s political agenda in the U.S. as well as economic growth in China, Japan, Switzerland and the Eurozone. Other leading macro-hedge fund managers in the U.S. followed closely, including Bridgewater Associates and Renaissance Technologies.

Institutional funds also seek macro-hedge fund strategies to manage volatility and mitigate losses in public pension funds and corporate retirement plans. Asset managers such as BlackRock and JPMorgan are industry leaders in macro-hedging portfolio solutions for institutional clients. (See also: World's Top 10 Hedge Fund Firms.)