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FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies

A global macro fund manager expresses a view that a country's currency peg is unsustainable and shorts the currency forward while holding local short-term bills as a hedge-like carry offset. Which risk is the most distinctive feature of this type of discretionary macro trade compared with a diversified systematic CTA?

The distinctive risk is concentrated event and gap risk. A discretionary macro bet against a currency peg can lose heavily and suddenly if authorities defend the peg or intervene, whereas systematic CTAs spread risk across many markets using rules-based sizing.

  1. AConcentrated event and gap risk, since the loss can be large and sudden if policymakers defend the peg or interveneCorrect
  2. BRebalancing risk from the daily volatility scaling of a large number of positions
  3. CModel overfitting risk from optimizing many trend-lookup parameters
  4. DLow liquidity risk because the trades are always in exchange-traded futures

Explanation

Discretionary macro trades are often concentrated, directional bets on policy or political events, so outcomes can be binary and gaps can occur. Systematic CTAs diversify over many markets and use rules. The other options describe systematic CTA features or incorrect claims about liquidity.

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