Understanding Global Macro Leverage

John Casano

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

Since the latter half of 2007, a number of significant macroeconomic factors have dominated the global investment landscape. What started out as a bursting of the housing bubble in the US turned into a cascade of events that eventually threatened the entire global financial system in 2008. During that period, many fundamental investment strategies based on micro-level analysis of companyspecific situations were challenged by highly correlated, volatile and downward-trending markets. At the same time, many global macro funds differentiated themselves from other hedge fund strategies by producing positive absolute returns and diversifying risk in institutional portfolios.

Global macro strategies typically do well in times of a sustained increase in the volatility of currencies, interest rates, commodities and equity markets. They also tend to outperform when markets are driven by overall macroeconomic themes rather than by the fundamentals of individual securities. It is therefore not surprising that institutional investors have shown an increased interest in global macro hedge funds