Dear Hedgeye subscriber,

Congratulations.

And thank you for placing your trust in Hedgeye. You have made a very smart decision joining our community of investors.

In the interest of getting you up to speed as quickly as possible, we created this special Macro Playbook primer for you.

Our goal is to give you a foundational understanding —start to finish—of the basics of how we analyze financial markets and identify compelling risks and opportunities.

We believe it will amplify your use of all of our investing research products and tools.

This Macro Playbook explains our quantitative models – like our proprietary risk ranges and GDP predictive tracking algorithm – as well as how we select our top investing ideas (stocks, bonds or ETFs). Our repeatable research process has been carefully crafted and refined throughout our decade in the independent research business.

Armed with this framework, we are confident you will make better investing decisions.

Thanks again for your business. Now buckle up—you’re about to take your investing game to a whole new level.

Table of Contents 

An Overview of Our Process

Just months before the onset of the 2008 financial crisis, Hedgeye warned subscribers the stock market top was in. We recommended booking gains, raising cash, waiting and watching. Risk management is ingrained in our DNA.

Copyright © Hedgeye Risk Management LLC.

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Why I Started Hedgeye: A Note From CEO Keith McCullough

Dear Hedgeye Subscriber, 

I want to take a minute to welcome you to our growing community of investors searching for a better way. Thank you for placing your trust in us. Together, my team of 40+ analysts and I are hard at work tearing down the edifice of Old Wall Street, brick-by-brick. There's much more work to be done.

Our story starts with my mother. It was November 2007. I had just been fired from the hedge fund I was working at (for being too bearish). Back then my father was a firefighter and my mother was a teacher, so it was an extremely humbling moment when my mom asked me, "How do you change the world with your job?"

Remember, this was around the time the U.S. economy tipped into its greatest downturn since the Great Depression. Making matters worse, the Financial Crisis exposed the worst in Wall Street: Its conflicts of interest, unaccountability and opaqueness. There had to be a better way. So we got to work. 

In 2008, Hedgeye was born.  From the beginning, we envisioned a level playing field between Wall Street and everyday investors. Our founding principles remain transparency, accountability and trust. We don't have an investment banking arm. We don't have a proprietary trading desk. We only prosper by delivering to subscribers the sharpest research around. Period.

In other words, my co-founders and I created something that didn't exist: Hedge fund-quality research for every day investors.
In this Macro Playbook, you'll quickly learn all the ins-and-outs of our research process - how we model global economies, what my "risk ranges" are, how we arrive at our investing conclusions and more. We think you'll find it useful.  

Before we get to that, I wanted to introduce you to the ins-and-outs of our Macro process and how they work together. In the 14-minutes video below, I’ll walk you through:
  • How we model the top 50 economies around the globe
  • How our quantitative risk range model helps investors buy low and sell high
  • How we help investors beat Wall Street by tracking consensus positioning
We encourage you to watch this primer on our repeatable risk management process.

Understanding Hedgeye's Macro Process
On a closing note, you're in good company with your subscription. Many of the world's smartest, most successful investors rely on our investment research. Our goal since Day One has been to create the most thoughtful research to help investors like you protect your portfolio and profit from the opportunities Mr. Market provides. 

Welcome aboard!  

Keith R. McCullough
Chief Executive Officer

Hedgeye has a repeatable process for analyzing global markets and economies. It's different from Wall Street. We don't rely on the "feel" of supposed market gurus, or "valuation" or the maxim that "this time is different." 

Our process rests squarely on the foundation of analyzing the dynamic history of markets. In addition to our fundamental research, we have a proprietary risk range model that incorporates elements of behavioral psychology to help investors make better buying and selling decisions across different asset classes.

In addition, our predictive GDP tracking algorithm forecasts the likely path for the U.S. and global economies. More on both in a second.


STEP 1

Quantitative Risk Ranges 

Our quantitative trading range model was developed by CEO Keith McCullough during his years as a hedge fund manager to augment his team's qualitative research views. The idea is simple: Create a quantitative risk management tool to help investors actually buy low and sell high.  

The model uses three core inputs - price, volume and volatility - to determine the likely daily trading range for any publicly-traded asset class. Again, it's simple. You sell at the top end of the range and buy at the low end.  

Keith's quantitative model is also multi-duration, meaning it dynamically adjusts to suggest critical thresholds - over our TREND and TAIL durations (see below) - after which, upon breaching these levels, an asset flips from bullish to bearish or vice versa.

PROCESS: RATE OF CHANGE CENTRIC

STEP 2

How We Model the U.S. Economy

In addition to our risk ranges, our Macro team has created a predictive tracking algorithm to suggest the future growth rate of the U.S. and other global economies.

Why?

We find two factors to be most consequential for forecasting future financial market returns: economic growth and inflation. We track both on a year-over-year rate of change basis (i.e. 2nd derivative) to better understand the big picture then ask the fundamental question: Are growth and inflation heating up or cooling down?

From there, we get four possible outcomes. Each is assigned a "quadrant" in our Growth, Inflation, Policy (GIP) model along with the typical government response as a result (neutral, hawkish, in-a-box or dovish): Growth accelerating, Inflation slowing (QUAD 1); Growth accelerating, Inflation accelerating (QUAD 2); Growth slowing, Inflation accelerating (QUAD 3); Growth slowing, Inflation slowing (QUAD 4).

TRADE = 3 weeks or less

TREND = 3 months or more

TAIL = 3 years or less

QUALITATIVE RISK MANAGEMENT

MEASURING AND MAPPING THE CYCLE

We tend to anchor on the U.S. because both our ongoing review of economic history and our real-time correlation studies have shown the U.S. dollar and U.S. rates to be the dominant factors in determining asset prices across cycles.

We run our GIP model for the U.S. and also the top 50 economies around the world covering 90% of global GDP to produce growth and inflation forecasts for each. (We encourage you to dig deeper with the video below about our GIP model video.) From there we head to our next step: What to Buy and Sell… Our Investment Conclusions.
Understanding Video | How We Model the U.S. Economy

Our Growth, Inflation, Policy (GIP) model is "the hallmark of our fundamental research process," says Hedgeye Senior Macro analyst Darius Dale in the video below.

The key question: Is growth and inflation heating up or cooling down?
If you know the answers to both of those questions you can select investments based on what works in each of the Quads. "In QUAD 1, for instance, where growth is accelerating and inflation is slowing, that has historically been really positive for both equity and credit data across all sectors of the U.S. economy," says Dale in video above. "Whereas when you think about QUAD 4, in which growth and inflation are slowing concomitantly, that has historically actually been quite negative for both equities and credit."
After building this base of knowledge, we can now select what we like and don't like based on our historical back-testing of the different asset classes that perform best in each of the four quadrants.

Below is a color-coded chart showing the performance of different asset classes in each of the QUADs (along with another much simplified, rule-of-thumb table breaking down what works in each QUAD), from equity markets sub-sectors to fixed income to commodities and foreign exchange.

STEP 3

What To Buy And What To Sell … Our Investment Conclusions 

WHY DOES THE SECOND DERIVATIVE MATTER?

Of course this isn’t enough.

After looking at our proprietary risk ranges and GIP model there are three other essential market signals to check before we make a call on individual asset classes. These include our Asset Allocation model (TACRM), Wall Street consensus positioning via CFTC futures and options data and the market Volatility signals embedded in options markets.  Below are three essential videos plus some additional insight into why each is so critical.

Understanding Video | How We Think About Asset Allocation

TACRM's (Tactical Asset Class Rotation Model) asset allocation signals are generated using a highly quantitative risk management system. At its core, "TACRM measures volatility as a leading indicator of prices," explains Senior Macro analyst Darius Dale in the accompanying video detailing how TACRM works. The model tries to identify shifts in momentum and deteriorating or accelerating breadth to spot asset classes that are breaking out or breaking down. 
The ultimate goal? To quantify expected returns of asset classes and individual factor exposures to generate a diversified portfolio designed to keep you ahead of the next big market move.

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Just as important as vetting the fundamentals of any investing idea is knowing the investment community's positioning around that idea. Namely, is this a consensus or contrarian trade? It's another essential tool in your investing toolkit since, if Wall Street is too bullish or bearish, you may have already missed the move.

At Hedgeye, we measure and map the CFTC's Commitments of Traders report, across asset classes, to learn precisely that: What does current investor consensus positioning look like and where can we add the most value with a non-consensus market call?

Understanding Video | Wall Street Positioning & How to Track It

Understanding Video | How To Interpret Volatility
Understanding volatility is another essential tool in your macro toolkit. At Hedgeye, we have a nuanced view about how to incorporate this measure into your portfolio decision-making process.

Due to popular demand for a primer on the topic, we produced a special video, "Understanding Volatility," with Macro analyst and resident volatility guru Ben Ryan. By taking the pulse of implied relative to realized volatility, we can get a good read on whether investors are becoming more fearful or more complacent.

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STEP 4

Quarterly Investment Outlook 

Analyzing all of these market signals, alongside our proprietary risk ranges and GIP model, come together to form our Quarterly Investment Outlook. In a nutshell, we condense our current thinking into the three most important macro themes our Macro team has identified for the coming quarter.

Each theme is carefully selected, via our mix of quantitative and fundamental Macro research, to identify what Wall Street is missing about the current macroeconomic environment globally. The goal is to get you (or your clients) ahead of what comes next by suggesting stocks, bonds, currencies and ETFs that will benefit from these evolving trends.

Below are our three themes from Q3 2017 for reference.

Q3 2017 MACRO THEMES

About Hedgeye

As you already know, we are fixated on delivering superior investment ideas.   Our research team at Hedgeye is composed of over 40 analysts, including some of the most highly-regarded analysts in the industry. 

We combine 1) quantitative 2) fundamental 3) macro analysis with an emphasis on duration.

With our Macro team covering the top down research and our 12 equity market Sector Heads (plus 5 analysts on our Washington Policy team) dissecting their industries bottom-up, the end result makes Hedgeye's research products the most intelligent, high-octane research around. 

That's how our CEO Keith McCullough (who leads our Macro team) is able to use the "Style Factors" our Macro team likes and doesn't like - such as growth over value or large cap over small cap - and select from among our Sector Head's best ideas the stocks that fit our style preferences. 

For instance, let's say we are bullish on large-cap Tech stocks. McCullough could identify a Tech stock that fits the bill among Technology Sector Head Ami Joseph's best ideas. You get the point.

STEP 5

Macro Meets Micro - Our Favorite Stock Ideas 

QUICK BACKGROUND

Our investment research team is headquartered in Stamford, CT. It is made up of analysts with buy-side and sell-side experience. Our policy research team is based in Washington D.C. It is composed of seasoned veterans with many decades of experience. They have deep, high-level experience and contacts having worked in a variety of positions. Together, both possess an unparalleled understanding of how policy affects the markets and the economy.

Our goal is simple. Since "Day One" nearly ten years ago, our goal has been to build the most thoughtful and thorough research team on Wall Street. We seek to translate our uniquely combined knowledge into successful investment opportunities for all of our subscribers-big and small.

Our investment experience includes time at Carlyle Blue-Wave, Ardsley Partners, Buckingham Research, Morgan Stanley, Dawson-Herman Capital, Wells Fargo Securities, to name a few, while our combined policy experience includes time at the U.S. Court of Appeals, U.S. Energy Department, U.S. Office of Defense, U.S. Federal Reserve, U.S. Chamber of Commerce, and more.

Hedgeye Risk Management is an independent investment research and online financial media company. Focused exclusively on generating and delivering thoughtful investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the most highly-regarded research analysts on Wall Street, all with buy-side experience, covering Macro, Financials, Energy, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Consumer Staples, Internet & Media, Housing, Materials, Technology, Demography and Washington policy analysis, including Macro, Energy, Healthcare, Telecom & Media and Defense.

A Final Note...

This framework forms the foundation for all our investment conclusions whether you're a subscriber to ETF Pro, Market Edges, Real-Time Alerts, The Macro Show, Investing Ideas, the Early Look, Risk Ranges or get all of this critical market intel with Hedgeye Risk Manager.

We hope this primer helps you better navigate the deep complexities of financial markets. We challenge you to find more intellectual bang-for-your-buck out there!

-  Hedgeye

P.S. If you have any questions about our process or products, please do not hesitate to email Hedgeye Customer Service Director Matt Moran at info@hedgeye.com.

Trade/Trend/Tail Risk Management Process

(data as of 8/2/2018)

GIP MODEL RISK MANAGEMENT OVERLAY

MACRO OVERLAY 

Macro Process: Us vs. Them