Global Macro: Portfolio Diversification for Turbulent Times

January 2021

This paper examines systematic global macro as a source of portfolio diversification, particularly when equities and bonds are under stress. It distinguishes discretionary from systematic macro, and within systematic macro it separates directional, trend-following approaches from purely cross-sectional ones. Using returns-based style analysis, it shows that most funds carrying the systematic macro label are in fact driven mainly by trend signals. A purely cross-sectional approach, which holds offsetting long and short positions in each asset class, behaves quite differently. Because it profits from relative moves rather than market direction, it tends to have low correlation to stocks and bonds. The analysis suggests such a strategy may perform well precisely when equity markets decline and when dispersion across assets is high. The paper is written for allocators, OCIOs, and consultants weighing liquid diversifiers for equity-heavy portfolios, and it takes no view on any individual market.

What This Paper Examines

How discretionary and systematic global macro differ.
Why many systematic macro funds are driven mainly by trend signals.
How a purely cross-sectional macro approach is constructed to be market-neutral.
How cross-sectional macro has behaved during equity market declines.
Why higher dispersion across assets can create opportunity for macro.

Key Findings

Much of the “systematic macro” universe is really trend following. Style analysis suggests directional trend signals dominate the risk of many funds carrying the systematic macro label, so the category is less diversified than it appears.
Cross-sectional macro is structurally different from trend. Holding offsetting long and short positions in each asset class removes net market exposure, which distinguishes it from directional macro and lowers its correlation to trend.
Market-neutral macro tends to diversify equity risk. Because returns come from relative moves rather than market direction, cross-sectional macro has historically shown low correlation to stocks and bonds.
Macro can perform when equities fall. The approach has tended to hold up during periods of equity market stress, which is when diversification is most valuable.
Dispersion across assets creates the opportunity. Cross-sectional macro tends to do better when returns within asset classes are more dispersed, a condition that often accompanies diverging monetary policy.

The Authors

Deepak Gurnani, Founder and Chief Investment Officer

Deepak Gurnani is the Founder and Chief Investment Officer of Versor Investments. Deepak has three decades of experience in applying quantitative methods to uncover alpha across global equity markets. Over the past decade, he has focused on pioneering the use of AI and alternative data in equity investing.

Ludger Hentschel, Founding Partner, Investment Advisor

Ludger Hentschel joined Versor Investments as a Founding Partner and is based in New York. Ludger has over 20 years of experience in quantitative research and investing.

Disclaimer: Past performance is not necessarily indicative of future results. For informational purposes only. Not an offer to sell or a solicitation of any type with respect to any securities or financial products.

Methodology: The strategy studied trades liquid futures and currency forwards across four asset classes: equities, fixed income, commodities, and currencies. Forecasts are grouped into short-, medium-, and long-term horizons and combine market data, economic statistics, and alternative data. Returns-based style analysis, following Sharpe (1992), decomposes the SG Macro Trading (Quantitative) index into trend and cross-sectional macro components using monthly data. Simulated cross-sectional macro returns are then examined across different equity-return and dispersion regimes over a sample from 2002 to 2020.

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