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Sunday, April 19, 2009

Global Macro Trading and Asset Class Diversification

By John Malthus

Among the ten asset classes we have cash, equities, fixed income, commodities, currencies, real estate, private equity, venture capital, collectibles, and statistical arbitrage. Obviously not all of these are easily accessible by most retail investors but you can still get into five or more.

The first asset class is cash. Cash is the safe haven when we can't find any other good trading opportunities. For instance if stocks look like junk and bonds are no good you will likely have some money in cash as you wait for a good opportunity. So while its really a currency we look at cash as a separate asset class.

Equities are the next asset class on the list. We include domestic, foreign, and even emerging market stocks in the same broad asset class category. Equities represent ownership in a company.

Bonds also known as fixed income are simply loans to governments and corporations. In return for the loan you get interest payments. Most global macro traders look at US government, foreign government, and corporate bonds when looking for a fixed income trade. By looking at multiple sub classes we have more opportunities for great risk to reward trades.

Commodities are up next. Commodities include things like base metals, precious metals, agricultural products, livestock, and the energy complex like natural gas and crude oil. Macro investors are willing to invest in anything from gold to lumber to even livestock if they can find a good risk to reward opportunity.

The largest asset class is that of currencies. Currencies have long been one of the primary trading assets for macro traders. If you have an opinion on one country versus another then you have a basis for a trade. If the reward outweighs the risk then you can have another asset class to trade.

So what of the other assets classes? Well they tend to be less liquid so you need a lot of money to trade them well. For instance you can make a lot with real estate but you need to have a long time horizon. Same goes for art, venture capital, and private equity. You can trade this stuff but it takes a different time frame then most investors are used to. - 23208

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