Opalesque Industry Update - Some of the proxies for risk aversion have been increasing lately, somewhat similar to autumn 2007. The lower the yield curves in the West-ex Japan, the higher is the probability that a Japan-like, deflationary environment is what we’re up against. Inflation fears have been easing and don’t seem to be a big worry at the moment. |
Throughout the summer, data signals have become more alarming. US Banks continue to hoard cash. Many proxies for business and consumer sentiment have risen to April/May 2010 but are now off those interim highs.
For equity investors, autumn has its perks. Many corrections occurred in autumn. Whether this will hold true in 2010 we do not know. However, self-fulfilling prophecy can work in mysterious ways.
We recommend hedging directional equity risk for a while. The institutional investor has various options to execute such a view, two of which are (i) replace long-only exposure through long/short exposure, (ii) hedge by using simple overlay strategies.
Recent hedge funds performance was sub-stellar. Neither the hedge fund industry nor equity long/short has reached its high-water mark. Investors are growing tired of hearing that the performance of hedge funds looks pretty good given circumstances. They shouldn’t. Equity long/short seeks to benefit from opportunities within the equity market.
The equity risk premium could be regime-specific, i.e., a function of rising population. Japan has a falling population and a negative equity risk premium. Coincidence? Hardly.
The full report can be downloaded from www.ineichen-rm.com