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News Bulletin : ADA News Bulletin November 2010
28 NOVEMBER 2010 Last month's article illustrated how an allocation of a portion of your portfolio to absolute return funds (often referred to as alternative investments) can reduce your overall risk and enhance your returns. Most investors with a traditional portfolio made up of shares, property and fixed interest are buying investments that they expect to increase in price. There is a directional bias in these portfolios as the portfolio only performs well if the prices of the underlying investments increases. However, the prices of these traditional assets are strongly interlinked and a portfolio tends to suffer whenever markets weaken, which results in higher portfolio volatility. Absolute return funds are designed to make money in either rising or falling markets and therefore an allocation of a portion of your portfolio to these types of alternative investment strategies can enhance your return whilst simultaneously lowering the overall risk of your investment portfolio. This month I will look at a particular alternative investment strategy known as global macro investing. The most famous investor using this style of investment is legendary hedge fund investor, George Soros. In 1992, he became known as 'the man who broke the Bank of England' by selling pound sterling in the belief that the United Kingdom would be forced out of the European Exchange Rate Mechanism (ERM). On 16 September 1992 this investment paid off for George Soros and his investors when the British pound fell below its minimum level in the ERM resulting in profits in excess of one billion dollars. WHAT IS GLOBAL MACRO INVESTING? Most fund managers buy stocks and bonds by analysing companies and industries and then basing their investment decisions on fundamental information like the quality of management, competition, profits and P/E ratios. These managers focus on the micro issues that affect these companies and attempt to control risk by thorough fundamental analysis. A manager might choose a portfolio of well managed companies but still perform poorly if the overall market declines. However, many alternative investment managers prefer to take a macro approach to investing in that they attempt to look at the big picture and the interrelationship between different economies and markets in order to uncover investment opportunities. Global macro managers typically use a top-down global approach to investing. They analyse changes in global economies that are influenced by economic, political or government- related events and through this analysis they look for investment opportunities that might occur as a result of these events. For example, when shifts in government policies affect interest rates which in turn affect a range of financial instruments such as currencies, stock and bond markets or commodity prices, global macro managers make investments that are designed to profit from these changes. Successful global macro managers anticipate these events and policy changes often making their investments via highly liquid derivatives which enhances their investment returns whilst simultaneously limiting the downside risks by utilizing strict risk controls. These managers aim to achieve consistent, absolute returns that are uncorrelated to global equity and bond markets. Preservation of capital is of paramount importance so global macro managers aim to manage risk rather than avoid it. The portfolios are designed with rigorous risk management frameworks to manage risk in a consistent manner. The manager is able to quantify the risk in each investment and is therefore able to precisely match the risk and return. Portfolios are also regularly stress tested to ensure the funds can withstand the unexpected events that affect markets. One of the major advantages of the global macro strategy is the ability for fund managers to take positions in multiple markets across a wide variety of investment instruments. Unlike conventional fund managers who have most of their assets invested in one market, the global macro manager can look for opportunities around the world. Hence, the reference to the key word 'global'. As a result of this flexibility global macro funds can avoid bear markets in one country and take advantage of bull markets in another. This is known as relative value investing where the prospects of a particular type of investment are better in one market than in another. Compiled by Michael Lannon How they work GLOBAL MACRO HEDGE FUNDS investment insight www.2020directinvest.com.au/ada | 1800 352 021 100% entry fee rebate on managed funds
ADA News Bulletin October 2010
ADA News Bulletin December 2010