The Macro Book

Building an Investment Process

You have possibly seen my twitter/X post about what other elements I am currently working on in order to make Paper Alfa better. One of them is building a Macro Book where we go from idea generation to portfolio construction by building a front—to—back process.

I have pondered about names, and I’ve asked you for some suggestions. The best I could come up with is PAMB, which immediately reminded me of the following scene in Step Brothers. “PAMB”, of course, stands for Paper Alfa Macro Book.

As in any investment process, there are going to be the following steps we will need to tackle. We will take it step-by-step, of course.

1. Idea Generation

   While very individual, I think it’s important to re-hash some basics when it comes to this. It is not as much about where ideas come from but how they are being recorded and what the necessary ingredients are for a solid framework. It obviously needs to be actionable and present observable signposts for a risk/reward consideration.

2. Idea Structuring

   This element is very important. Often, I have found myself with the right idea but the completely wrong structure or implementation. So that will need some careful assessment.

3. Risk / Sizing

   We have the idea and have the implementation or structure. How do we go about sizing this trade appropriately? Where do we set the stops and targets?
   

4. Portfolio Construction

   How do we go about putting all trades into a portfolio? This, as you would expect, is the somewhat holy grail in portfolio management. How do we fine-tune and stress-test our portfolio? Are there any blind spots we need to be aware of or hedge?

5. Risk Management
   Now the portfolio is running, let’s analyse our portfolio and see whether it trades as we intuitively thought. Does it behave as expected? Do we need to adjust some trade sizes to reflect a better balance? What happens when we hit drawdowns or targets? What if our conviction levels drop, and we want to reduce positions?

6. Start at 1 again
   As it's an ever-evolving process, we not only keep an eye on our positions and the overall portfolio but also on what new trade ideas are on our radar or close to being added. What risks are on the horizon?

Source: Dall-e

Mostly, I am expecting to have fun in this exercise. It should hopefully prove educational but also allow room for real-world application. It is by no means a perfect process, so I will leave enough room for improvements as we go ahead.

I will make this available for all paying subscribers only, who will be able to participate in the idea generation and overall management of the portfolio. We won’t be day trading it, however, so we will have to think about good ideas and then let those trades run. The time horizon will typically be more than one month, and we will be able to take in a large array of asset classes, similar to how a proper macro book would look like.

I hope you are as excited as I am. This will hopefully give you some insights into the real-world application of macro investing.

Let’s go!