Global Macro is an important invetment strategy adopted by many hedge funds that uses a top-down view of markets to develop investment theses, instead of being tied to specfic formulae or arbitrage strategies.

Q. So these are one of the important flavors of hedge funds… what distinguishes them from other kinds?
A. One of the most important things is that Global Macro funds are not classic arbitrage-type strategies based on mean reversion, like a huge percentage of hedge fund strategies are. So a Global Macro guy might say… hey, I think the odds of QE3 are expanding right here, or I think oil prices have peaked out, and play that trend. An arbitrage strategy guy would be saying things like: the price of this security is out of whack with the price of that other security, and over time they’re going to come back into line, so I’m going to play that.

Q. So what are the big trends these guys are playing at the moment?
A. A few of the things they’re focused on, are the growth rate in China, weather conditions driving crop pricing, relative value of world currencies– the British Pound is cheap, the Yen is expensive. And global equities– if you don’t think the EZ will collapse, the EU equity markets look cheaper than the US market.

Q. So how do investors approach allocation to this category? How does it fit in with the other sorts of alternative investments you might be considering.
A. This is a really fundamental point. There are lots of funds that are based on some sort of “convergence” strategy, classic arbitrages that perform very well in normal markets. On the other hand, as we learned in 2007, lots of those traditional statistical relationships fly out the window in a period of extreme crisis. So that’s when “convergent” strategies tend to do poorly, but “divergent” strategies like Global Macro can do very well. And in fact, global macro has proven itself to be the best performing strategy class during crisis times.

Q. Which, looking at the Eurozone, for example, one might say are not exactly safely behind us.
A. Right. To me, alternative investing is the same as traditional investing in that sense: it’s crucial to allocate across types of strategies. It’s foolish to say, oh, I have X% allocated to alternatives. What kinds of strategies are you in, and how will they perform vis-à-vis each other in different economic climates? That’s the question.