Long Live Global Macro


The Cult of Loss Aversion: A Call to Rethink Risk in Global Macro Investing

In the wake of a traumatic loss, whether it is financial or personal, it is just human nature to overcompensate to make sure the experience is not repeated. But while that is understandable, it is rarely the best response. And so it has proved for many hedge fund investors over the past few years. While one could argue that each of the investor responses highlighted above has damaged investment performance, this article will focus on one specific issue: the cult of loss aversion in global macro investing.

The result has been a concentration of assets under management (AUM) amongst a few very large funds, many of which fetishize loss avoidance over all other factors in trade selection and risk management. Of course, risk management is an important part of any robust investment process. However, in modern macro investing the cult of loss aversion is becoming counterproductive given the fundamental and market outlook.

These days, most macro managers can be more accurately described as ‘hedged’ than ‘absolutely discretionary return’ investors. When legendary traders such as George Soros or Stanley Druckenmiller were making a name for themselves in the British Pound or Equities (yes, he was long a lot of them) they did not have a “hedge” against those positions because they truly believed in them. Sadly, very few macro managers have this level of conviction these days. They are too worried about taking a loss rather than a making huge profit.

In a world of many independent opportunities and a widely-dispersed asset base, it is completely rational for firms to use tight trade- and portfolio-level stop losses, because with rare exceptions (such as during times of acute market volatility) each stop loss decision has little bearing on the behavior of the market as a whole. Unfortunately, this does not describe the current state of the market.

Thanks to the static monetary policies operating in many major economies, there are relatively few independent investment opportunities with sufficient market liquidity to absorb a thematic allocation from a large global macro fund. As a result, the few such trades that do exist very quickly become over-crowded, particularly by the few large funds that dominate the AUM base of the strategy. Unfortunately, this leads to paranoia and a fear of loss rather than a healthy balance between risk taking and risk management.

When the markets do move, portfolio managers are incentivized to take profits or reduce risk very quickly. Why? Because macro investing has become a game of musical chairs, where investors need to make sure they are not the one caught out when the music stops. Those on the right side of the market, aware that most of the past five years have been characterized by range trading in foreign exchange and fixed income, move to ensure that they do not drawdown their investment gains. Those with losing positions, on the other hand, do not feel able to view markets through a value prism, and instead worry about the possibility of hitting their modest loss thresholds, and thus closing out positions at disadvantageous levels. Consequently, the de facto “macro” time horizon has been compressed into a few hours to a few weeks, leaving relatively few able to capitalize on the thematic gains that have traditionally characterized the strategy.

Although generating a 10%-12% gross return should not be a particularly hard target in an environment where risk parity funds have produced 20%+ annualized gains over the last few years, the current focus on loss avoidance above all else has condemned the macro strategy to a performance that is mediocre at best. If a portfolio manager is unable to weather a 5% drawdown without having his risk allocation cut or eliminated, how is he to participate in the type of trades that generate double digit returns? The answer is he cannot. Unfortunately, what is individually rational (i.e. cutting risk quickly to avoid hitting drawdown limits) has proven to be collectively irrational as the industry careens from stop-loss to stop-loss.

This negative feedback loop has provided even more incentive for investors to allocate elsewhere, and very often to managers dedicated solely to one asset class, including funds that are far less focused on loss aversion or a metric like a Sharpe Ratio. Remember, investors can market returns. They cannot market a Sharpe Ratio.

It is ironic that the macro strategy has lost its way considering the opportunity for out-performance from some of the big themes of the last four years – long Equities (yes that is a macro investment), long Interest Rates, long Credit, and short Volatility – was very large. These were strategies that in previous cycles made big profits for the macro managers who got them right.

They can do so again. That is why the call right now should be to re-think how investors look at risk. What investors should demand from their managers is a return to old-school macro investing, where themes are given time to play out, portfolio turnover is significantly reduced, and more focus is placed on absolute returns at the expense of fetishizing drawdown limitation.

At the very least, investors should take a look at the macro managers that have evolved post the Global Financial Crisis. A new breed of portfolio managers are emerging who are “risk conscious” and use their expertise in derivative products to add both edge and control to concentrated investing. True, their absolute AUM pales in comparison, and certain strategies may have liquidity constraints in terms of scale, but it is becoming easy to identify this group of “risk conscious” managers from those simply focused on loss aversion.

Ahh… The last highlighted and underlined point: my marketing edge in my pitch deck?

Who says Global Macro is dead



5 big figures in just over a month. Long live global macro.

And there may be more breadth for this run yet:
How low will yen go? Depends on the dollar

Some believe 110 is likely, and beyond:
Is USD/JPY Headed For 110?

Or even to infinity:
Our price target for the yen is infinity, says Axel Merk

Others turn up their noses and bad-mouth the currency:
Japan is eating its own capital
But the more important question is: Which has been, and will be, the better trade – the short Yen trade, or the long Nikkei trade?

[Forget about shorting JGBs, even though this is the market at the epicenter of the Abenomics money printing experiment. According to a certain smug HF-er, for us minnows, we ain't got enough skin in the game to gain convexity exposure on the JGB yield curve. But wonder how that short JGB trade is working out for Kyle Bass and his Hyman Capital, considering that he eschewed the long Nikkei component. Hope he bulked up more on his currency bet:
Bass: ...dollar/yen is going to 200... We’ve committed more capital to the currency market, but all of the convexity is in the bond market.

People have been predicting the coming collapse of JGBs for a long time, only to bleed to a slow death by a thousand glacial slow cuts.

花好月圓 Blooming flowers, full moon (but the heart is full and heavy)

The Mid-Autumn’s night of the fullest moon. A time of celebration, reunion, and love. But it’s been a chilly pensive day, and sky overcast and yellowed, moon wanly and balefully lit, night.
The heart is heavy and full.





-张先, 木兰花

Blooming Flowers, Full Moon

Whenever the flowers are in bloom and the moon is full, sad thoughts enter our minds. After the flowers are no longer in bloom and the moon is no longer full, the people begin to disperse. The festive atmosphere departs for the distant cloudy skies, and we are cut off from the past as if from a hazy dream that we cannot recall. The vibrant spring colors of the grass and trees succumb to the chaotic red shadows of fall. As they begin to chirp, the chickens’ songs become melancholy. We wish we could make the long days of spring longer. When we will be able to look up and once again gaze at the full moon?

-Zhang Xian, Magnolia Flowers
(translation taken from the wiktionary page)


One of Mum’s favourite songs from her favourite singer she was always humming and singing in the house.

周璇 – 月圓花好 Zhou Xuan – Full Moon Blooming FLowers (1940s):


浮雲散 明月照人來

清淺池塘 鴛鴦戲水
紅裳翠蓋 並蒂蓮開

雙雙對對 恩恩愛愛
這軟風兒向著 好花吹

Full Moon Blooming Flowers

The drifting clouds disperse, the full moon shines upon the gathering people
The most complete and joyous reunion, is this day and night (mid-autumn’s)

On the clear and shallow pond, the Mandarin ducks (coupled lifelong mates) frolic and play
Adorned with red garments and jade-green parasols, the twin lotus flowers bloom as one

Two-by-two pair-by-pair, tenderness coupled with love
This languid breeze blows towards, the blooming flowers
Tender and sweet love fills the earth









And a more modern rendition:

I hate calling market tops, but…

…Icahn, Soros, Druckenmiller and Zell’s all on my side. And most importantly, a UBS Client Advisor enthused excitedly, while we were sharing a hot jacuzzi tonight, that there’s no froth or bubbles in this current boiling-hot equities rally.

Okay, the encounter is a lot less salacious than it sounds. I was just soaking in the blisteringly hot outdoor jacuzzi in the estate on this slightly-chilly rained-out evening (recently found out that soaking my stiff and sore post-op lower back in hot water before and after my swim+water therapy sessions in the pool, eases the soreness and pain greatly) when this gent lowered himself gingerly into the steaming waters, and we do what us guys do when we find ourselves in close proximity sharing a small space half-naked with our wet bodies: we grunted/acknowledged each other, avoided each others’ eyes, shifted our positions to be as far away as the small space will allow using a divide-and-conquer algorithm, and started to meditate intensely upon the whatever-it-may-be but suddenly interesting object in front of us – for him a leafy tree or bush; for me, an amazingly deep azure blue ceramic tile arrayed into an Alhambra-like interlocking mosaic pattern…



But you can avoid filling in the awkward silence for only so long.

After we made our short introductions, what followed was actually a pretty interesting conversation. This Swiss gent with only the slightest of a Swiss-German accent in his English has been with UBS his entire career, starting with the famed Swiss direct apprenticeship at age 17 with their banks and financial firms, learning the ropes and working their way up through the ranks while obtaining their technical certification along the way. So, a true blue UBS man then. Very useful for me to pump him for some updates on the wealth and asset management scene in recent years, whether the trend towards IAMs (independent asset managers) is real and sustainable, his take and gauge on the popularity of discretionary portfolio mandates and/or managed account structures with clients, and his views of a certain once-gigantic-now-much-reduced-but-still-formidable US competitor. As expected, he took some swipes at Citi, for being silo-like across their functions, especially with client onboarding. (But I’ll reserve my judgement; after all, back in April I was seriously considering taking up an offer from an acquaintance in Citi for a portfolio position there. Thought it might be a good opportunity to see and experience a portfolio management role within the sell-side of the asset management industry, and potentially very useful for my eventual aims and ideas. But, am in a hurry to build my own thing…)

Anyway, as you would more or less expect from a client advisor/relationship manager, he’s a BOOYAH! bull.

Not sure whether he’s channeling Cramer, a previous Bianco, an expansionary Morgan Stanley, or his own cautiously hedged house view. But he was going on exuberantly about how we are still a long way off from the final euphoria stage of this current rally/bubble, and there’s ‘huge amounts of cash still sitting on the sidelines’.
Hmm, I still prefer the cool quantitative analysis of Hussman; though admittedly, what’s the point of being academically rigorous and iconoclastic, but with embarrassing negative returns over 1, 3, 5, and 10 year periods.

And here’s what the collective brain trust of the alternatives/hedge fund industry thinks of the current record S&P 2000 round number:


Icahn, Soros, Druckenmiller, And Now Zell: The Billionaires Are All Quietly Preparing For The Plunge

“The stock market is at an all-time, but economic activity is not at an all-time,” explains billionaire investor Sam Zell to CNBC this morning, adding that, “every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue; and when you got a demand issue it’s hard to imagine the stock market at an all-time high.” Zell said he is being very cautious adding to stocks and cutting some positions because “I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking.” Zell also discussed his view on Obama’s Fed encouraging disparity and on tax inversions, but concludes, rather ominously, “this is the first time I ever remember where having cash isn’t such a terrible thing.” Zell’s calls should not be shocking following George Soros. Stan Druckenmiller, and Carl Icahn’s warnings that there is trouble ahead.

Billionaire 1: Sam Zell

On Stocks and reality…

“People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.”

“I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking,” he said. “If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”

“It’s almost every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue,” he said. “When you got a demand issue it’s hard to imagine the stock market at an all-time high.”

He also lamented about how difficult it is to call a market top. “If you’re wrong on when, that’s a problem.” His answer: “You got to tiptoe … and find the right balance.”

“This is the first time I ever remember where having cash isn’t such a terrible thing, despite the fact that interest rates are as low as they are,” he added.
Billionaire 2: George Soros

Soros has once again increased his total SPY Put to a new record high of $2.2 billion, or nearly double the previous all time high, and a whopping 17% of his total AUM.


“Forgive”, this faux-iambic decasyllabic rubric

Hi. Welcome to this dusty and little
cobwebbed corner of the world wide sandbox;
where over a mote, the smallest tittle,

petulant kids throw sand and shout: “A pox!
A pox on your nose, and your rump to boot!”
A boot to their rumps and no cakes of chocs.

Be it sand in eye, or mouth filled with foot,
our rash words sadly are oft overlooked:
Beware splinters and logs in eyes take root.

Blind to our pride, Charon’s boat ride soon booked,
a one-way ticket to warm climes and sand,
of fire and brimstone, our rumps well-cooked.

Humbled and broken, and with hat in hand,
mumbled sorries – to reconcile we seek.
“Forgive”, the highest virtue in the land,

The earth, and all happiness, to the meek.

(Mostly-iambic decasyllabic rubric in terza rima pattern a la Dante.)

An irreverent limerick in tercet rime-r,
and in irredentistic not-so-iambic pentameter.
First cloddishly posted in this comment hither.

(Above is a 12/16/12 syllabic intro with a purring outer. Ha, I’m losing my edge. Literally.)

Soul mates. One’s not much without the other.

“Is that kind of an occupational hazard of soul mates? One’s not much without the other?”

“I love you!”

“I need Annie.” “That will change in time, Chris.” “Aw, come on, Einstein! Time’s not on my watch anymore. TIME does not exist here. And wherever it went, it’s not going to make me need Annie any less.”

“Chris, Annie’s dead… she killed herself.”
“I’m her soul mate. I can find her.”
“You don’t understand…that’s not how it works!” “It is not about understanding. It’s about NOT GIVING UP.”

“…but we’ll be together, where we belong.”
“…I can forgive you… for being so wonderful a guy would choose hell over heaven just to hang around you.”

“Hey… remember me?”
I’ll follow you into the dark (What Dreams May Come):

Song: I’ll follow you into the dark

Love of mine, some day you will die
But I’ll be close behind
I’ll follow you into the dark

No blinding light or tunnels to gates of white
Just our hands clasped so tight
Waiting for the hint of a spark

If Heaven and Hell decide
That they both are satisfied
Illuminate the no’s on their vacancy signs

If there’s no one beside you
When your soul embarks
Then I’ll follow you into the dark

In Catholic school as vicious as Roman rule
I got my knuckles bruised by a lady in black
And I held my tongue as she told me
“Son fear is the heart of love”
So I never went back

If Heaven and Hell decide
That they both are satisfied
Illuminate the no’s on their vacancy signs

If there’s no one beside you
When your soul embarks
Then I’ll follow you into the dark

You and me have seen everything to see
From Bangkok to Calgary
And the soles of our shoes
Are all worn down

The time for sleep is now
It’s nothing to cry about
‘Cause we’ll hold each other soon
In the blackest of rooms

If Heaven and Hell decide
That they both are satisfied
Illuminate the no’s on their vacancy signs

If there’s no one beside you
When your soul embarks
Then I’ll follow you into the dark
Then I’ll follow you into the dark

Hey… remember me?
I’m not much without you…

The Vestibule of Hell

The Inferno
Canto III




These words their aspect was obscure I read
inscribed above a gateway, and I said:
Master, their meaning is difficult for me.

And he to me, as one who comprehends:
Here one must leave behind all hesitation;
here every cowardice must meet its death.

For we have reached the place of which I spoke,
Per me si va ne la città dolente,
per me si va ne l’etterno dolore,
per me si va tra la perduta gente.

Giustizia mosse il mio alto fattore:
fecemi la divina podestate,
la somma sapienza e ‘l primo amore.

Dinanzi a me non fuor cose create
se non etterne, e io etterno duro.
Lasciate ogne speranza, voi ch’intrate.

Queste parole di colore oscuro
vid’io scritte al sommo d’una porta;
per ch’io: «Maestro, il senso lor m’è duro».

Ed elli a me, come persona accorta:
«Qui si convien lasciare ogne sospetto;
ogne viltà convien che qui sia morta.

Noi siam venuti al loco ov’i’ t’ho detto

[aba, bcb, cdc, ded, efe, f...
I loved Dante's interwoven lines of rhyme, like weaving a fine embroidery, threading and stitching together a cadence so tight and strong...the divine terza rima schema]

Abandon all hope, ye who enter here…[into Hell]

Hell is just the reality/illusion your deadened mind conjures up within which you are trapped, for as long as your soul is eternal; cleaved from the ones you love and gave up everything for – even life – to reach.

What Dreams May Come – My Immortal:

“I’m sorry for all the things I’ll never give you
I’ll never make you smile
I apologize for every time I failed you…especially this one”


I’m so tired of being here, suppressed by all my childish fears
And if you have to leave, I wish that you would just leave
Your presence still lingers here and it won’t leave me alone

These wounds won’t seem to heal, this pain is just too real
There’s just too much that time cannot erase

When you cried, I’d wipe away all of your tears
When you’d scream, I’d fight away all of your fears
And I held your hand through all of these years
But you still have all of me

You used to captivate me by your resonating light
Now, I’m bound by the life you left behind
Your face it haunts my once pleasant dreams
Your voice it chased away all the sanity in me

These wounds won’t seem to heal, this pain is just too real
There’s just too much that time cannot erase

When you cried, I’d wipe away all of your tears
When you’d scream, I’d fight away all of your fears
And I held your hand through all of these years
But you still have all of me

I’ve tried so hard to tell myself that you’re gone
But though you’re still with me, I’ve been alone all along

When you cried, I’d wipe away all of your tears
When you’d scream, I’d fight away all of your fears
And I held your hand through all of these years
But you still have all of me, me, me

Sometimes When You Win, You Lose

[Like an Impressionist painting, that's what I always remembered about this film.]

I just bought this DVD last Friday and re-watched this old movie again after more than 10 years, over the weekend 5 days ago, prompted by a late night piquant conversation and spirited discussion on reincarnation, the six realms/六道, buddhist 涅槃/nirvana, the christian doctrine of heaven, hell and purgatory, and on Dante’s Divine Comedy – Inferno | Purgatorio | Paradiso. She had not seen the movie before and I remembered some parts of it may help illustrate what we were talking about.

Then, the shocking news popped up on my news feeds late last night…

Dumbfounded. Saddened.

Those who know the film will know just how painfully reflective some parts, themes, and scenes of the movie parallel this sad situation.

And its not this scene. Don’t dare to show the other scary ones.
Sometimes When You Win, You Lose (What Dreams May Come Scene):