BijaAdvisors

Better Decisions, Better Results

Seeds of Thought
Cognitive Science Meets Investment Management

Issue 14-6
December 3, 2014

When Macro Lost Its Way

As I prepared to launch my own hedge fund, I met with the head of a large fund-of-funds for guidance.
The question I was grappling with was whether we should call ourselves a macro fund. After all, Im not
a momentum trader, I often dont have an opinion on the Euro or the Dollar, my positions are rarely one
dimensional, and I actually do well in low vol environments. Its why my correlation to the macro
indexes is nearly zero for 12 years now.
If Im not macro though, what am I? I express my views almost exclusively through options, but Im not
a vol trader. Emerging markets often represent a large proportion of my positions, but Im not a carry
trader. In fact, my correlation to the indexes of just about everything that characterizes my portfolio, is
also close to zero. The answer is simple, said my fund-of-funds friend. If you trade macro products,
then youre macro.
This hasnt always been the case, though. Back when George Soros took on the Bank of England, he
was truly global macro, not because he was using currencies and fixed income products, but because the
views he expressed were driven by global macro themes. For the most part, what masquerades as global
macro today is really just short-term, momentum currency and/or rates trading. What I would call,
global micro. It tends to employ tight stops as a pretense for discipline, VaR typically chases returns, and
those returns have suffered.

How Did This Happen?

Early macro hedge funds were incredibly successful, however, few people could actually define what
macro meant. Yes, money chased the success, but also its esoteric nature. You cant charge fees to be
long equities or long debt, but you can charge for mystery and potential. Even allocators will often
readily admit they dont quite understand macro, so they either avoid it or opt to outsource to
consultants, many of whom have perpetuated the shift from global macro to the watered down version.
Unfortunately, macro is nearly dead. There are very few old-school macro fund managers left, and more
often than not, those that do exist are simply investing their own money, because the demand for
consistent, short term returns with low volatility is not conducive to truly global macro investing.
Global macro is chunky. It is early and explosive. It sees what others cannot, or will not. It gets the
difference between a scene, an act and a play. More than anything, global macro understands the context
within which data is released and policy decisions are made. It has its own opinion on that policy,
understands its implications and how to capitalize on them.
Ultimately, I chose to define myself as global macro, not because of the instruments I employ, but
because my positions are driven by the broadest global macroeconomic themes, and Im not
embarrassed to admit it. Often, when I present my views, it evokes the response, Fascinating, but how
do you trade it?, to which I cant help but respond, How do you trade without it?
!
Copyright 2014 by Bija Advisors LLC.; BijaAdvisorsLLC.com
Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute
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Bija Advisors Seeds of Thought

Issue No. 14-6

The truth is, macro trading is fundamentally all about momentum, but the kind of momentum that is far
more powerful, and the results of which, are far more predictable than the global micro kind. However,
they often take time to play out and its that time frame that seems to trip many up and turn some people
off, particularly these days. That, I believe, is how global macro lost its way. It allowed itself to be
transformed into just another short-term, myopic investment style, interchangeable with any of the
others. However, its drivers are not like those of all the others, and therein lies the problem.

How Do You Trade It?

To be honest, I struggle to comprehend how it is that one can trade markets like oil, grains, emerging
markets and even US Treasuries without giving great consideration to things like the orchestrated
urbanization of the most populated country in the world, representing a shift in global demographics of
historic proportions, whose impact will be felt both today, and for generations to come. While global
macroeconomic trends are longer term, they are also more certain. When short-term cycles run counter
to the long-term waves, it creates opportunity, but only if you truly grasp the context in which those
cycles are occurring. Otherwise, you risk getting caught up in the minutiae and hyperbole of the shortterm phenomenon.
For example, it was the global macro context that drove me to go long Brazilian Real when Lula was
first elected and the currency was collapsing in value. It is why I saw the jump in steel exports from
Japan to China in 2004 as the death knell for Japanese manufacturing. It allowed me to recognize the
brief window of opportunity when tropical emerging markets could become wealthy for the first time in
history. In the summer of 2012, that context gave me the confidence to sell corn at the all-time highs,
when markets were focused on the hysteria that comes with a 50 year drought. Its why oil trading at
$115 per barrel attracted my attention, and I remain bullish equities.
Whats truly amazing is that the period in which some of the most powerful global macro trends have
played out, has seen some of the worst results from the trend following global macro community. I
will admit, the pressure to become global micro is difficult to resist, even for the most ardent of macro
types among us. As a start-up hedge fund, its nearly impossible these days.
Since I began writing as Bija Advisors, Ive been bombarded with advice on how to sell it and once
again, I find myself being sucked in, but here, I can resist. What I produce is intended to provide the
global macro context necessary for deciphering the implications of policy action, commodity prices,
unemployment data, volatility and all the other global micro factors. Yes, context takes time and
patience to develop, but the payoff can be both more certain and explosive. Two things global macro is
sorely lacking.

Et Tu, IMF?
Christine Lagarde, managing director of the IMF, sounded alarms
in the latest World Economic Outlook, warning that the global
economy was at risk of a new mediocre in which a prolonged
period of weaker growth could be expected. The basis of the
argument was a comparison between pre and post crisis GDP. What
surprised me by the soundbite was the inclusion of the word new,
for if you use the IMFs own data, theres nothing new about a 30+
year trend, except perhaps using a prolonged period of outlier
positive growth (03-07) as the basis for comparison.
Copyright 2014 by Bija Advisors LLC.; BijaAdvisorsLLC.com
Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute
Important disclosures appear at the back of this document

Bija Advisors Seeds of Thought

Issue No. 14-6

About the Author

For nearly three decades, Stephen Duneier has applied cognitive science to investment management, and
life itself. The result has been top tier returns with near zero correlation to any major index, the
development of a billion dollar hedge fund, a burgeoning career as an artist and a rapidly shrinking
bucket list.
Mr. Duneier teaches Decision Analysis in the College of Engineering at the University of California
Santa Barbara. Through Bija Advisors' publications and consulting practice, he helps portfolio managers
and business leaders improve performance by applying proven decision-making skills to their own
processes.
As a speaker, Stephen has delivered informative and inspirational talks on global macro economic
themes, how cognitive science can improve performance, and the keys to living a more deliberate life, to
audiences around the world for more than 20 years. Each is delivered via highly entertaining stories that
inevitably lead to further conversation, and ultimately, better results.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America and
Managing Director of Emerging Markets at AIG International. His artwork is represented by the world
renowned gallery, Sullivan Goss. He received his master's degree in finance and economics from New
York University's Stern School of Business.
Bija Advisors LLC
Web: BijaAdvisorsLLC.com
Email: info@bijaadvisorsllc.com
Twitter: @BijaSeeds
Podcast RSS: BijaSeeds
LinkedIn: Duneier
Phone: 805.452.9429

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Copyright 2014 by Bija Advisors LLC.; BijaAdvisorsLLC.com
Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute
Important disclosures appear at the back of this document