Global macro hedge funds are responsible for producing some of the more well known billionaire hedge fund managers, such as George Soros. It is also my favorite strategy, as the ideas behind it can be easily applied by individual investors. The strategy is very broad and makes use of virtually any security in any financial market, whatever best exploits the tactical aspects of the fund manager’s overall theory about what is happening in the world.

Understand that I am not suggesting that an individual investor can run their own portfolio exactly in the same manner as a hedge fund with billions of dollars. What I am suggesting is that, to a degree, individual investors can and should apply some of the same concepts that the big hedge fund managers use in order to get a better risk adjusted return.

The global macro strategy has become increasingly important as an approach to investing because of globalization. Given the nature of today’s global economy and the effect of growth in less developed countries, an individual investor is practically forced to understand what is happening on a global economic scale.

To apply the global macro strategy, the hedge fund manager usually applies a top down research methodology. The goal is to understand and form a theory about the broad economic trends that are at work in the global economy and the effect they are having on individual markets.

A traditional top-down analysis occurs in three steps. The first step includes an analysis of the various countries economies and financial markets with the outcome being a decision on which country(s) and asset classes to allocate funds to. Second (assuming the focus is on equities), an analysis is performed at the industry level. The industries and countries that will prosper or suffer based upon the analysis at the first level are identified. Third, specific firms within the chosen industry(s) are analyzed. Once the firm’s value and outlook are understood, a determination is made if it is over or undervalued, and in light of the higher level analysis positions are then taken.

If the individual investor has an overall theory about what is happening in the world, it is now easier than ever to apply that theory tactically. The modern day investor now has access to liquid securities that would allow him to apply the global macro strategy on a small scale. Want exposure to currency markets?, no problem, just portion of your account in one of everbanks.com’s foreign currency cd’s or open a forex account at one of the many forex brokers. Want exposure to international stock markets? No problem, put a portion of your portfolio in exchange traded funds or American depository receipts, or open an account online at a broker that offers access to foreign markets (etrade, boom.com, etc). Want exposure to commodities? You can trade futures in virtually any commodity online as easily as stocks. Want to buy bonds denominated in a foreign currency? That’s not a problem either. You don’t have to be a million dollar client of an investment bank to do this kind of stuff anymore.

It is also becoming increasingly easy for individual investors to get involved in the more complex financial derivatives. Obviously, I do not recommend this. It is just poor risk/reward, and it is never a good idea to get involved in something you don’t entirely understand. However, if you had a good theory about what is happening in the world economically isn’t it a good idea to take advantage of that? For example, if you understand that commodities are in a long term bull market, economies such as China are experiencing rapid growth, and the US dollar is in a long term decline, wouldn’t it be a wise to take an approach to investing that utilizes these trends to the fullest?

Some may argue that the global macro approach lacks focus because the universe of securities to invest in is so broad. I would argue that it is a focused strategy because it is based on a theory hat is applied in a tactical manner. It only lacks focus if the ideas driving the decisions about where to invest are unfocused. If there is no specific theory backing the global macro strategy, then it would lose focus tactically. The investor first must do his top down research and decide on the dominant theory and trends that will back his tactical decisions. Once he has a good theory about what is happening, he can pick and choose how to apply it through the multitude of securities that are available to him. - John Bardacino