Credit: Shutterstock photoJim Leitner is the greatest macro trader you have never heard of. He was once a currency expert on Wall Street, pulling billions from the markets, but now he plays the game through his own family office.
Leitner understands the Macro Ops "go anywhere" mentality better than any other trader:
He will jump into any asset or market, no matter how esoteric. Some of his craziest investments include inflation-linked housing bonds in Iceland and a primary equity partnership in a Ghanian brewer. He even had the guts to jump into Turkish equities and currency forwards with 100% interest rates and 60% inflation during the late 90s. The man is a macro beast.
Foreign exchange trading
Leitner was one of the first traders to understand and implement foreign exchange carry trades. A carry trade involves borrowing a lower interest rate currency to buy a higher interest rate currency. The trader earns the spread between the two rates. He explains in Steven Drobny's "Inside The House Of Money" :
Foreign exchange carry trades can be extremely lucrative. But if you get caught holding a currency during a surprise devaluation, it can instantly erase all your profits and then some. Leitner was able to protect himself by keeping a close eye on central bank action:
Leitner understands currencies mean revert in the short term and trend in the long term. He has explored the use of both daily and weekly mean reversion strategies:
Options
No one has mastered global macro options better than Leitner. He knows when they are overpriced and when they make a great bet:
This is akey concept that very few option traders understand . High volatility does not mean huge trends. And low volatility does not mean no trends. It is possible to have low volatility trends and high volatility ranges.
These overpriced long-dated options become essential in choppy markets. They allow you to "outsource" risk management. You can play for a long-term trend without the risk of getting stopped out by a head fake:
Psychology, emotions and fallibility
Like every other star trader, Leitner has strongemotional control . He views all trades within a probabilistic framework and fully accepts his losses:
Along with reigning in his emotions, he also acknowledges his ownfallibility :
It is not possible to "crack" the market. You are guaranteed to eventually be proven wrong no matter how smart you are. And when that time comes, you have to stop the bleeding before death occurs. The trading graveyard is littered with smart guys who thought they solved the market puzzle. Don't be one of them.
Investment narratives
A compelling narrative is both a blessing and a curse.
On one hand, understanding the dominant market narrative will keep you on the right side of a powerful trend. But it can also lure you into some dumb trades. Not all narratives are rooted in fundamental reality. Oftentimes, a false trend will form and lead to aboom-bust process . Here is Leitner's take:
Leitner's team always starts with quantitative scans when hunting for equities. If the quant data does not check out, there is a higher risk of falling prey to an overhyped narrative.
Longs vs. shorts
It is no surprise that being long financial assets has a positive expected value over time. Stocks and bonds pay a premium toincentivize investors to move out of cash and take risk .
This is why you need twice your normal conviction to go short. The system is designed to move higher over time, so you better have a good reason to fight that drift.
Leverage
Mention the word "leverage" around rookie traders and they will run for the hills. Most think it is a quick way to blow up a trading account. But the pros view leverage as a tool that can completely transform and enhance risk-adjusted returns. Ray Dalio ( Trades , Portfolio ) is traditionally the one credited with using this concept to make billions.
Say you have a 30-year bond that returns 6% a year above the cash rate. It has a maximum drawdown of 20%.
You then compare it to a stock index that returns 9% a year above the cash rate. It has a maximum drawdown of 50%.
By applying leverage, you can transform the bond into the higher-performing asset. Using 2 times leverage on the long bond will give you 12% returns with 40% drawdowns. This is a much better deal than the stock index on a risk-adjusted basis. This technique is known as "risk parity."
Leitner applies it to his fixed-income investments:
Going levered long two-year notes is a better risk-adjusted trade than going long a 10-year note. You get the same return in the levered two-year, but with less volatility.
Most investors cannot exploit this because they cannot use leverage. But a macro trader using futures can perform all sorts of financial wizardry and vastly outperform a typical cash-only fund.
Portfolio construction
Over time, Leitner has adapted his strategy away from traditional global macro. Instead of using market timing, trend following and gut feelings -- the pillars of old-school macro -- he has shifted to a multi-strategy approach.
He combines various system-based strategies across five main asset classes: Equities, Fixed Income, Currencies, Commodities and Real Estate. His goal is to earn the risk premia present in each category. He then reserves a certain amount of his cash for big, special situation bets that only come around a few times a year.
The approach is the most robust way to allocate capital. Most of the macro legends of the 1970s, 80s and 90s have moved to a family office format and implemented something similar to what Leitner describes. At Macro Ops, we too use a combination of discretionary and systematic strategies to make sure the cash register keeps ringing year after year.
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This article first appeared on GuruFocus .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
