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Macro-Hedge

What is 'Macro-Hedge'

An investment technique used to eliminate the risk of a portfolio of assets. In most cases, this would mean taking a position that offsets the whole portfolio. But this technique is difficult in practice because there is rarely one asset that will offset the risk of a broader portfolio, so applying a macro-hedge most likely requires taking an offsetting position in each individual asset.

Explaining 'Macro-Hedge'

Here's an example of a macro-hedge: an index-fund manager believes there will be a loss in the index in the upcoming period. To eliminate the risk of a downward turn in the index, the manager can take a short position in the index fund's futures market that will lock in a price for the index.


Further Reading


Chapter 3 Dynamic Linkages between Global Macro Hedge Funds and Traditional Financial Assets'
www.emerald.com [PDF]
… in the wake of the 1997 turbulence in Asian currency markets, its remit is broader: it considers not just “macro” hedge funds that take positions in currency markets on the basis of their assessment of current and prospective macro- economic and financial fundamentals, but the …

Hedge fund and commodity fund investments in bull and bear marketsHedge fund and commodity fund investments in bull and bear markets
jpm.pm-research.com [PDF]
… in the wake of the 1997 turbulence in Asian currency markets, its remit is broader: it considers not just “macro” hedge funds that take positions in currency markets on the basis of their assessment of current and prospective macro- economic and financial fundamentals, but the …

Estimating hedge fund leverageEstimating hedge fund leverage
papers.ssrn.com [PDF]
… in the wake of the 1997 turbulence in Asian currency markets, its remit is broader: it considers not just “macro” hedge funds that take positions in currency markets on the basis of their assessment of current and prospective macro- economic and financial fundamentals, but the …

The law and economics of hedge funds: Financial innovation and investor protectionThe law and economics of hedge funds: Financial innovation and investor protection
heinonline.org [PDF]
… in the wake of the 1997 turbulence in Asian currency markets, its remit is broader: it considers not just “macro” hedge funds that take positions in currency markets on the basis of their assessment of current and prospective macro- economic and financial fundamentals, but the …

Measuring the market impact of hedge fundsMeasuring the market impact of hedge funds
www.sciencedirect.com [PDF]
… in the wake of the 1997 turbulence in Asian currency markets, its remit is broader: it considers not just “macro” hedge funds that take positions in currency markets on the basis of their assessment of current and prospective macro- economic and financial fundamentals, but the …

The trouble with hedge fundsThe trouble with hedge funds
onlinelibrary.wiley.com [PDF]
… in the wake of the 1997 turbulence in Asian currency markets, its remit is broader: it considers not just “macro” hedge funds that take positions in currency markets on the basis of their assessment of current and prospective macro- economic and financial fundamentals, but the …



Q&A About Macro-Hedge


How does macro-hedge work?

In most cases, this would mean taking a position that offsets the whole portfolio. But this technique is difficult in practice because there is rarely one asset that will offset the risk of a broader portfolio, so applying a macro-hedge most likely requires taking an offsetting position in each individual asset.

Why do managers use macro-hedges?

To eliminate risk from their portfolios. Managers don't want to lose money on any investments they make so they hedge their bets by making sure they're not exposed to too much risk at once. They also do it because investors often demand it as part of their contracts with fund managers; investors want fund managers who can minimize losses while maximizing gains, which means minimizing risks when possible.

What does "lock in" refer to in the context of hedging?

Lock in refers to locking into a price for something before it happens so that if the thing happens then you'll know what your profit or loss will be beforehand instead of having no idea what your profit or loss will be until after it has happened (which could lead to bad decisions). For example, let's say I'm going out with my friends tonight but I don't know how much dinner will cost yet; I might ask them how much dinner costs ahead

What is macro-hedge?

Macro-hedge is an investment technique used to eliminate the risk of a portfolio of assets.

What does it mean to take an offsetting position in each individual asset?

It means to take short positions on all assets you believe are overvalued and long positions on all assets you believe are undervalued. This way if your prediction was wrong and prices go up or down, you'll still be fine since you have taken opposing positions for every asset.