Global Macro Trading and the Benefits of Diversification

by Brevan Soros
Most long time investors have heard that diversification is the only free lunch on Wall Street. If you have used a financial advisor to pick your investments for you, you may have been told you were diversified but the way it usually works out your diversification is weak at best and in some cases is almost non existent. Obviously you just need to learn the proper way to diversify.

The typical planner will have you put some of your money in domestic stocks, some in foreign stocks, and then place some money in bonds. If that is all you are doing you are not getting nearly the benefit you could be getting and in reality you are barely diversified at all.

Proper diversification will invest your money in several different asset classes as well as diversify in different trading strategies. Global macro traders have known this for years and consequently as a group have had positive returns over the last ten years.

The world of global macro trading will have you looking at several different asset classes such as domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. In fact some traders will get even more diversified by investing in collectibles, private equity, venture capital, etc. Basically anything that has different economic drivers is worth looking at as for a potential investment as it diversifies your risk.

As traders and investors we should all be looking for the best risk to reward scenarios out there instead of just being involved. If you are doing that then it helps to look at multiple markets so that you can always be putting money at risk in an intelligent manner.

Of course as alluded to earlier we can diversify in more than one way. Cast your net wide and put money is several asset classes but you can also diversify by looking at different trading horizons. For instance if you can manage multiple strategies in the same asset class then do that, if you cant hire an outside manager that can. For instance you can put money with an uncorrelated commodity trading advisor and then put money with a long term trend following commodity trading advisor. By doing this you are catching short term and long term movements in commodities. You can do the same types of things with other asset classes.

By diversifying both wide and deep you will be able to capture alpha or returns in a more consistent manner. Will you make money every day, week, month, or even year? There are no guarantees but properly diversified you will almost always outperform stock market indexes, especially on a risk adjusted basis.

If you are a relatively active investor you can achieve positive returns in multiple asset classes yourself by building market beating models in different markets. Yes, you can and indeed should use bottoms up research but in the spirit of being efficient with your time you should automate as much as possible so that you are able to be a more efficient global macro trader and miss fewer of the potential opportunities that occur in different markets

source: http://barex.biz/2009/global-macro-trading-and-the-benefits-of-diversification/