Geopolitical Risk in Global Macro Investing

David Murrin

This article was first published as a chapter in Global Macro: Theory and Practice, by Risk Books.

Global macro managers have to navigate a complex web of interconnected risks: market, credit, liquidity, financing, counterparty and operational, to name but a few. While all of these risks are different – and reasonable market practitioners can disagree about how best to deal with them – in at least one respect they are all similar: the nature of these risks has been well researched and documented, and as such they are relatively well understood. Dedicated risk management functions, with sophisticated infrastructures and high-calibre quantitative staff, have been built up over the years to measure, monitor and manage these risks.

In contrast, geopolitical risk, which can have a material and lasting impact on an investment portfolio, is neither well researched nor particularly well understood. While risk management systems and methodologies have evolved dramatically since the 1970s, there has been no visible progress in the way market practitioners analyse and manage geopolitical risks. There are no geopolitical analogues to commonly used market risk models such as value-at-risk