Macro Investing is an approach that attempts to anticipate and profit from global trends and shifts in world markets. It capitalizes on changes in global markets due to economic, political or government policy changes. George Soros was one of the first hedge fund managers that became famous for using a macro approach to investing. However, this approach has become ever more popular and it is used by many of todayâs hedge funds.
Based on a macro approach the investor makes a prediction on global trends and use investment instruments such a stocks, bonds, currencies, and commodities to make bets on them. This includes making a bet that a country, currency, industry or specific asset class will appreciate or depreciate in value.
George Soros became famous for his macro investing approach when he sold the pound sterling short and forced the United Kingdom out of the European Exchange Rate Mechanism (ERM) on black Wednesday 1992. He became known as the man who broke the bank of England.
At a time before most countries had freely floating exchange rates, the pound sterling had closely been following the German mark in the years leading up to 1990. In its desire to keep up with Germany and other European nations the UK left interest rates low and inflation high. The UK entered the ERM with a target to keep its currency above 2.7 marks to the pound. However, this was not a sound policy because the UKâs economy was weaker with more unemployment and higher inflation than that of Germany.
Soros realized that the UK would not be able to keep up its peg for long. He made a $10 billion bet that that the sterling would not be able maintain the agreed upon lower limit at the ERM. His fund borrowed sterling and sold it short by exchanging it for of Deutschmarks and French francs to drive down its price.
The UK tried desperately to prop up its sinking currency that was being frantically sold in the currency markets as a measure to prevent the sterling from falling below its minimum level on the ERM. The country was losing billions of pounds trying to prop up its currency and when this measure failed the UK was forced to withdraw from the ERM as a last resort. Soros made a billion dollars on this trade.
Legendary investor Jim Rogers uses a macro investing approach and makes bets on commodities, whole industries, and even entire countries. Jim Rogers studies the global market place and watch for major trends and shifts that he can make bets on.
For example, Jim Rogers has been optimistic on the growth and future of China and has made bets accordingly. In 1979 China was far behind the rest of the world economically when Deng Xiaoping reformed the Chinese economy system and laid the foundation for future growth. Since that time the Chinese economy has experienced tremendous growth and has created a lot of wealth. Investors in China have benefited through growing profits of Chinese companies that have translated into higher share prices and growing dividends, as well as increasing real estate prices and an appreciating currency.
The growth of china and other emerging markets has caused an increase of demand for commodities that are used for buildings, roads, cars, equipment and more. The Combination of underproduction of commodities and an increase of demand has ignited a commodity bull market which Jim Rogers bought into through his commodity index (RICI) which has gone up several hundred percent since its inception.
You donât have to be a billionaire investor or a hedge fund manager to use a macro approach to investing. There are plenty of investment tools to take advantage of global trends. There are ETFâs, stocks, and bonds available to take full advantage of a macro investing approach.
There are ETFâs that invest in entire sectors or specific asset classes. For example, GDX give investors exposure to the gold mining sector, VDE invests in the energy sector and there are many more ETFâs that invests in both single commodities and board baskets for commodities. ETFâs such as RRPIX allows investors to bet on higher future interest rates.
ETFâs offers less risk than individual stocks since it is possible to be right on a global trend but still lose money on a single company. Correctly identifying a global trend further reduces risk of volatility and selloffs since the overall trend cause the sector to move upwards and with time will rescue investors that buy into trend just before a selloff.
Indentifying global trends are not all that difficult. One must keep an eye open, read the news, study the market and look for imbalances. Markets that are substantially overpriced or underpriced on a historical level will eventually correct and present investment opportunities.