Macro-Hedge Meaning ETF Strategies Alternatives
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A macro-hedge is an investment technique used to mitigate or eliminate downside systemic risk from a portfolio. Macro-hedging strategies involve using derivatives to take short positions on broad market catalysts that can negatively affect portfolio performance or specific underlying assets.
Macro-hedging requires the use of derivatives to take inverse positions on targeted assets and asset categories affected by a macro catalyst.
The macro in macro-hedge refers to risk mitigation around macroeconomic events. Therefore, macro-hedging generally requires foresight, access to economic data, and forecasting skills to project market reactions and investment securities when trends occur. However, in some cases, macro-hedging positions may be easily foreseen by a series of events leading to a predetermined outcome.
Macro-hedging requires access to market trading platforms and the ability to utilize various financial instruments to build market positions. Thus, macro-hedges are most often used by sophisticated investors and professional portfolio managers. Investors without broad market access can turn to retail offerings such as exchange-traded funds (ETFs).
Inverse and ultra-inverse ETFs have made macro-hedging easier for retail investors confident in a negative outlook for a particular sector or market segment. One recent example is Brexit, which caused short-term losses in U.K. stocks and deflated the British pound. Many investors took short positions in U.K. stocks and the British pound, resulting in substantial market gains following the Brexit vote and subsequent events.
Other macroeconomic events driving macro-hedging strategies include a country’s GDP expectations, inflation trends, currency movements, and factors affecting commodity prices. ProShares and Direxion are two ETF providers that offer a range of ETF products for macro-hedging. Inverse products protecting against a bearish outlook include the ProShares UltraShort FTSE Europe ETF, the ProShares UltraShort Yen ETF, and the Direxion Daily Gold Miners Index Bear 3X Shares.
Macro-hedging strategies are often considered alternative investment strategies as they fall outside the realm of traditional long-only portfolios. Using derivatives creates additional risk of capital loss for a portfolio. Leverage is often used, requiring the investment to outperform its borrowing rate.
However, macro-hedging strategies can be successful when significant market movements occur. They can also be used to offset a portion of a portfolio likely to be affected by a macro projection. This involves taking targeted inverse bets on portions of a portfolio or overweighting securities expected to outperform.
In November 2017, Bloomberg reported on Singapore’s PruLev Global Macro Fund, the world’s best-performing global macro hedge fund. The fund reported a 47% gain from macro-hedge positions benefiting from former President Donald Trump’s political agenda in the U.S. and economic growth in China, Japan, Switzerland, and the Eurozone. Other leading macro-hedge fund managers in the U.S. followed closely, including Bridgewater Associates and Renaissance Technologies.
Institutional funds also seek macro-hedge fund strategies to manage volatility and mitigate losses in public pension funds and corporate retirement plans. Asset managers such as BlackRock and JPMorgan are industry leaders in macro-hedging portfolio solutions for institutional clients.
