Intelledgement, L.L.C.

Intelligently hedged investment

Strategy: macro analysis

“When my information changes, I change my opinion. What do you do, Sir?”

— John Maynard Keynes

Macro analysis is one of the classic strategies employed by hedge funds. Typically, macro hedge funds aim to profit from changes in global economies brought about by shifts in geo-political factors that impact interest rates, currency, stock, and bond markets. Macro hedge funds invest in all major markets—equities, bonds, currencies and commodities—though not always at the same time. Most aggressively utilize leverage and derivatives to accentuate the impact of market moves. Probably the most famous single macro analysis coup was the killing George Soros made in 1992 when his Quantum Fund massively shorted the overvalued British pound.

The key difference between Adams’ “Unified Theory of Everything Financial” strategy and a macro analysis strategy is that Adams would have you put on blinders and slog straight ahead through the waves and troughs to achieve—in the long run—a market return…while with a macro strategy, you would maneuver not only to avoid taking on so much water but to ride the large waves and thereby cover more distance to achieve—in the long run—a market-beating ROI. A macro analysis investment strategy is flexible and enables you both to avoid pitfalls and take advantage of opportunities.

Q: Who’s your Daddy? A: Macro analysis!

According data published by Greenwich Alternative Investments (formerly Greenwich-Van)—whose hedge fund indices are among the most widely recognized—Macro-strategy hedge funds on average between 1988 and 2009 produced a compounded annual growth rate (CAGR) of 14%, which handily beats the CAGR of the market overall during the same time frame (S&P 500 = 7%).

This is a huge difference. Remember the table that shows how much you would save in 40 years with a market CAGR of 8%? Well, let’s say you follow a macro strategy, but you only beat the market by half as much, and instead of realizing a CAGR of 14%, you only get 11%. At the end of 40 years, still investing the same $153,000 (less than $4,000 per year), instead of just shy of $600,000 and—assuming you never touch the principal—an average annual income of say $47,000, you now have just shy of $1.1 million…nearly double! And an average annual income of $120,000. Quite a difference.

And if you do get 14%, then the bottom line is $2.2 million…start with $3,000 and, over 40 years, gradually add in $150,000…and end up with $2.2 million…and an average annual income of $300,000…the power of compounded interest is sheerly amazing!

The only constant is change

Another aspect of the Adams theory is the ironclad 70%-in-stocks/30%-in-bonds rule. This is consistent with his “fire-and-forget” approach—which presumes that any variation to the master plan is likely to make things worse—but ignores that fact that folks’ requirements change over time. For most people, it makes sense to be more heavily invested in the stock market when they are younger, both because the earlier one starts the compounding at the (likely) higher rate, the more one ends up with, and because if the more risky stock market deals a setback, when you are younger you have more time to recover. Conversely, folks who are nearing retirment generally should cut back on their exposure to the market.

Will a successful implementation of a macro strategy outperform the average market return overall for the next few decades? No one can know for sure, and, as the lawyers always insist we point out, past returns are no guarantee of future performance. What we can say is that if you agree that the success of humanity on an evolutionary scale is due to our intelligence and adaptability, then it stands to reason that you can improve your odds of ending up on the right side of history by actively trying to figure out where that is. We are all in for some interesting times ahead. If Intelledgement can help you to be asking the right questions to prepare you to navigate you and yours through, then even if it turns out that you disagree with our answers, the relationship could payoff big for you.