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Industry Updates

Fund of fund group International Asset Management presents its 2011 strategy outlook

Thursday, February 10, 2011

Morten Spenner
Opalesque Industry Update – Morten Spenner, CEO at International Asset Management Limited (IAM), one of the oldest specialist independent fund of hedge funds managers, outlines IAM's outlook across a range of strategies for 2011. These include Long/Short Equity, Credit, Macro, Event Driven, Fixed Income Relative Value and CTAs.

Long/Short Equity

Positive return outlook with medium risk outlook

  • Asian and Emerging Markets continue to offer the highest secular growth opportunities while the US economy remains at the head of the recovery amongst the other developed countries.
  • Sovereign debt concerns, potential increases to base rates and tightening monetary conditions in China will create headwinds for investors and managers may well have to navigate equity market corrections along the way.
  • Last year downside protection in equity long/short strategies were robust and in line with historic averages. We expect this downside capture profile to be maintained this year but for the strategy to offer attractive risk/rewards as the capture by managers of upside returns reverts to historic norms.
Credit

Positive return outlook with medium risk outlook

  • Structural market inefficiencies brought about by the stratified traditional investor base creates opportunities through mispricings. While bond and loan prices have generally strengthened, there remain pockets of value on the long side.
  • The large volume of debt maturing after 2011 should provide managers with interesting potential trades on both sides of their portfolios.
  • Differentiation in credit quality, continued valuation anomalies and potential for further stress continue to create a reasonable opportunity set, albeit within what has recently been a more difficult trading environment.
  • Managers with a long/short approach in the strategy with fundamental credit, balance sheet analysis skills and technical trading experience are favoured.
Macro

Neutral return outlook with high risk outlook

  • Trading at the front end of curves will remain tactical but curve trades have gained more traction and more of the curve length is now being used by managers. Large amounts of Treasury issuance add to the opportunity set. H
  • igh levels of expected underlying market volatility should continue to provide trading opportunities.
  • Managers that have a bias towards either commodities or Emerging Markets are favoured. Strong risk management skills in these areas are essential. Managers focused on fixed income markets should also have the opportunity to provide reasonable returns.
Event Driven

Positive return outlook with medium risk outlook

  • More constructive conditions in equity markets, high corporate cash levels and strategic need for deals are likely to lead to further increases in M&A volumes. The low interest environment may also encourage further LBO activity.
  • The current opportunity set for managers focused on distressed has diminished, however, default rates for companies with capital structures of less than $1bn are not improving in line with the larger cap companies and this may provide opportunities to those investors with strong sourcing and workout capabilities.
  • We currently favour those Multi-Strategy Event Driven managers that can be selective across a wide range of opportunities in equity and credit related event strategies across the capital structure.
  • There is the potential for higher returns from some specialist managers focused on niche areas of the credit markets.
Fixed Income Relative Value

Neutral return outlook with medium risk outlook

  • Bond volatility has risen again across various measures and this will continue to help create opportunities for trading orientated managers. It is anticipated that reasonably high levels of volatility will remain and that trading will be more active.
  • The size of government auctions in the US remains massive. The ongoing need for these auctions to be successful and the scale of the issuance across the curve every month is providing recurrent trading opportunities.
  • Although increased volatility in bond markets has now created more potential opportunities for curve trading, managers will need to remain nimble.
Trend Followers/CTAs

Neutral return outlook with high risk outlook

  • In the longer-term, we continue to favour highly experienced managers that constantly evolve their trading models and invest in their infrastructure and systems.
  • CTAs exposure still provides good diversification benefits to portfolios but this benefit is currently reduced by their present long equity and commodities biases however we believe the trends in equities and commodities are most likely to drive positive returns this year. Source

    (press release)
    bc

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