About Our Framework
In contrast to many macro research firms, I look at every macro theme with the objective of finding trades that offer asysmetric payoffs. At the heart of this process is the belief that economic fundamentals do ultimately reprice markets. After identifying the theme, I build a fundamental economic framework for the theme. This step has many advantages. Clearly it illuminates the channel through with the theme will reprice markets. In addition, often times it links seem lying unrelated markets to each others. Further, it highlights many potential catalyst for the repricing, which is the third step. In many cases, there are no near catalysits, so there are no trades. The final step is choosing the implementation if there is a catalyst. I look across asset classes and countries for trades, which actually increases the number of potential trades. Over the last 10 years, this framework has averaged about 10 to 15 trades a year.
Our Four Step Process
Step 1: Identify a macro theme that could reprice markets
–What macro events are currently driving markets?
Step 2: Build a fundamental economic framework for the theme
–What are the underlying economic channels through which the theme could reprice markets?
Step 3: Determine event and probability of a it realizing over the next 6-12 months
–What could trigger the repricing of the markets from the theme and when could it happen?
Step 4: Find the best implementations using a net payout ratio
–What is strategy looking across asset classes and markets, if any, give a 3 to 1 of potential net return versus risk?
Framework Produces High Sharpe Ratio Implementations