Just a few dozen bona fide traders make their living in the global macro hedge fund world. They manage a $400 billion slice of the $2 trillion total hedge fund pie. I have probably met half of them.

Few global macro managers are purely top-down traders. They employ some strategists and economists who think top-down, but global macro traders rarely work from 30,000 feet. They usually begin as specialist tacticians in markets like nonferrous metals, oil or Treasuries. If they survive, they trade more assets, more currencies and more “crosses” over time, learning how to profitably handle a complex global macro portfolio. Most of their trading ideas come from the bottom up in a couple of the segments they know well, idiosyncratically mixed with broad themes that they have developed. But several times every day, they carefully check the portfolio of these trades against their views of the macro world for consistency and for risk management purposes — what some call their reference scenario.

As I described in a March article in Institutional Investor, I started exploring the global macro world back in 2005, when the Central Intelligence Agency gave me an informal license to hunt for intelligence insights among macro traders. We thought Washington could learn a lot from the care with which global macro traders built and monitored their reference scenarios, because they have powerful incentives to get it right and lots of money to construct sophisticated early-warning systems. In that article I totted up the political decisions that move these reference scenarios, speculated about which government actions that move markets were becoming more or less opaque (or transparent) from a trading perspective and flagged some methods that smart traders use to get an early-warning jump on these events — or at least avoid being crushed by them. ....

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