Macro hedging is a method risk mitigation centered around macroeconomic events—those large scale areas of an economy. Such activities include changes in inflation, unemployment, gross domestic product (GDP), or some other economy-wide phenomena.
While hedge funds utilize derivatives to take short positions against such events, retail investors can use Exchange Traded Funds (ETFs) for similar protection.
This hedge requires extensive study of news and economic indicators.
The investor's knowledge of macroeconomic events and associated triggers dictate the level of protection.
Low to Moderate
Based on the purchase of an ETF, this strategy is low cost. If derivatives are used, it can get expensive.
The way to create a macro-hedge is first to discover an economic indicator. Next, you must determine what assets are affected by this event. Last, purchase an ETF designed for macro hedging.
For example, consider the Brexit, an event where the United Kingdom left the European Union. According to the BBC, "A public vote (known as a referendum) was held in June 2016, when 17.4 million people opted for Brexit. This gave the Leave side 52%, compared with 48% for Remain."
The result was a deflated British pound and losses in many U.K. stocks. Those investors understanding the economic indicators made substantial gains following the Brexit vote.
© 2020 Todd Moses
The strategies discussed are for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any currency or to adopt any investment strategy. There is no guarantee that any strategies discussed will be useful. Todd Moses is not a licensed securities dealer, broker, or US investment adviser or investment bank.