Macro Made Easy with Managed Futures

“I am fully diversified and ready to profit from the next macro event.” “Interesting,” I think to myself as I listen to the astutely dressed gentleman basically quoting a TD Ameritrade commercial. He is addressing a small audience that has gathered at a friend’s dinner party. As a financial professional, my ears tend to perk up when I hear someone use words like “macro” and “diversified” in a sentence.

The words “macro” and “diversified” are very impressive sounding. Like the gentleman at the dinner party, if you use them (even though you might not know what they truly mean) you sure do sound smart. Investing for “macro events” has been the hedge fund guys game for the last three years. When you are a hedge fund  manager, half your day is consumed with coming up with impressive  names for your investing strategies. Bonus points are given for the proper use, and combination of an ancient Greek word, “macro” and “return” in the title.

For normal folks like you and I, what is “macro investing” and is it something we should even care about? Macro investing is really quite a simple concept. Investors should care about  world altering events, and how they affect the financial markets. The term “macro investing” comes from the study of macroeconomics, which is evaluating economies as a “whole.” Think GDP (gross domestic product).  So when you are investing based on macro data you are investing capital on the premise of economic outcomes on a large scale. An example would be buying or selling the 30yr US Treasury bond based on the outcome of the Federal Reserve’s interest rate decision. These large themes will impact how investments are made at a macro level (e.g. jobless claims, CPI, PPI, etc.)

If there was a tradable index, like the S&P 500, that tracked America, in terms of GDP or any other productivity based indicator, that would be a macro investment vehicle. When GDP grew, the index would gain value. When weekly jobless claims rose, the index would fall.  Unfortunately, this type of vehicle doesn’t exist and investors are left to figure out what stocks are the most macro sensitive.

It gets really tough when you factor in macro data, and asset valuations in other countries or even economic blocks for that matter. Ever wonder why video of Greeks hurling yogurt at policeman got you stopped out of your Apple stock?
Since most of us average investors do not have the money required  to invest in a big name “Macro Hedge Fund” what can you do? May we suggest investing in the markets that fuel economies? Wouldn’t it make sense that if an economy is growing it would require additional consumables to continue to grow? Want another name for a consumable? How about a commodity.

That’s right. In my opinion, there is no better macro trade than in the commodity markets. If an economy is growing it consumes more of everything from crude oil to copper, soy beans to platinum. Professional traders, known as Commodity Trading Advisors (CTA) offer investors a way to potentially capitalize on these trends.

The Barclay CTA Index tracks performance of a number of Commodity Trading Advisors reporting to the database since 1980.

A key benefit to this type of investment, commonly referred to as Managed Futures, is that the commodity futures markets allow traders to easily, and efficiently short markets . This is a tremendous tool when macro environments turn negative. The ability to profit from a price decrease is a significant advantage. An economy that is contracting uses less crude, sugar, corn, and copper. The ability to profit from this contraction is perfectly suited for a trend following type Managed Futures strategy.  Trend following CTA programs offer the best exposure to the underlying asset, and have historically performed well during large market dislocations.

Trend following strategies are abundant within the Managed Futures investment arena. At Great Pacific we would love the opportunity to share these unique programs with you. Managed Futures may not be a fit  for every clients investment goals, but for most investors they can serve as a strategic alternative to traditional investments.

Remember, phrases like “global macro diversification” make you sound smart at a cocktail party, but real intelligence is when you actually have that  type of investment in your portfolio.

Past performance is not indicative of future results. The risk of loss in trading commodity futures and options can be substantial no matter who is managing your money. There are substantial risks and conflicts of interests associated with managed futures accounts and you should only invest risk capital. Trading in commodity futures and options is not suitable for all investors. If you are unsure your financial circumstances permit you to invest you should seek professional advice.