Risk Management in Global Macro Funds

By Barry Schachter

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

The purpose of this chapter is threefold. First, to provide an overview of some key principles of risk management as they apply to global macro investing. Second, to consider how risk controls are applied in the day-to-day management of global macro funds, while emphasising that the risk management function is much broader than just its quantitative elements. Third, to explore some open challenges, both conceptual and practical, to risk management in global macro and the investment industry more generally.

There are two broad categories of global macro strategy: the systematic approach, with computer-driven algorithms at its core, and the classic discretionary approach, which is built around qualitative analysis and risk taking by individual portfolio managers. Within these categories the strategies may be further sub-divided based on types of trades (eg, directional versus relative value), geographic focus (eg, developed versus emerging markets) and asset class specialisation (eg, currencies, commodities, volatility). There is also a broad range of possible investment horizons.

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