Global Macro Investing: Discretionary vs. Systematic Approaches

What is Global Macro?

Global macro is an alternative investment strategy that involves investing, long or short, in global financial markets. The strategy is typically associated with managers taking positions in markets based on fundamental analysis of the world economy.

This approach to global macro investing contrasts with another, increasingly popular approach that Winton has pioneered over the past 26 years: systematic trend following. Trend-following strategies, which invest across the same markets as discretionary macro managers, take positions systematically based on the direction and strength of price trends.

When Positions Align

At times, discretionary macro managers and trend followers can adopt similar positions, albeit for different reasons. Both investing styles fared well during the 2008 global financial crisis, profiting from rallying government bonds and declines in stock markets. It was a similar story in 2022, when both styles correctly anticipated the decline in fixed income markets, as inflation climbed to multi-decade highs in many of the world’s major economies.

Over the long term, however, discretionary macro and systematic trend-following strategies have produced distinct return streams, with periods of high correlation offset by periods of low to negative correlation (see chart below).

Correlation Between Discretionary and Systematic Approaches

^{Source: Winton, Societe Generale, as at 31 May 2023. Discretionary returns are represented by the SG Discretionary Global Macro Trading Index, while systematic returns are represented by the SG Trend Index.}

An Unexpected Contrarian

The reason that performance diverges at times is that trend-following strategies ignore economic fundamentals insofar as they are not reflected in market prices.

Take 2017 and 2019, for example: two years when correlations between discretionary macro and trend-following strategies turned negative. Concerns about the protectionist policy of the recently elected Trump administration led macro analysts to make cautious forecasts for the S&P 500 heading into 2017. These fundamental forecasts were subsequently revised higher as markets trended steadily upwards. Similarly in 2019, central banks were widely expected to start increasing interest rates, leading to higher yields and lower bond prices. Instead, policy remained accommodative and yields trended lower.

In both scenarios, trend-following strategies behaved in a contrarian manner, taking positions that conflicted with market narratives and fundamentals, which proved to be profitable when markets defied expectations.

Trend Following vs. Fundamental Forecasts

^{Source: Winton, Wall Street Journal Economic Forecasting Survey, Bloomberg Bank Strategist Survey. The starting point of each line indicates the index level/yield on the date the forecast was published.}

Ahead of the Trend

Trend following is often perceived as a strategy that simply “follows the herd”. This metaphor is inadequate, as the strategy has been shown to be particularly profitable precisely when it holds positions that – at least, initially – are at odds with the prevailing market consensus.

Price trends tend to emerge in markets as the consensus position gradually shifts. And trend-following strategies – which dispassionately adjust their positions each day in response to new information – do not face the dilemmas of discretionary managers over when to get on board, throw in the towel, or change course.

The diversification benefits that this distinct, systematic approach to global macro investing entails, makes trend following a valuable addition to most multi-asset investment portfolios.

James Gilbert is Winton’s Head of Client Solutions

Find out more about trend following and the Winton Trend Fund (UCITS).