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Morten Spenner

Long/Short Equity
Positive return outlook with medium risk outlook

• Strong earnings growth should help to drive equities higher but macroeconomic concerns are likely to put pressure on markets again in the future. We believe equity markets have over discounted the risks of a double-dip in economic growth and therefore currently offer reasonable value.
• Equity correlations are much higher than usual and we expect them to come down again over time as equity markets revert to being driven more by fundamentals. There will be less magnitude in the daily divergence and a greater mix in stock and sectoral performance. This should, once again, create a more constructive environment for fundamental stock picking and aid the ability to add value in both the long and short sides of the book.
• Asian and Emerging Markets continue to offer the highest secular growth opportunities while the US economy remains in the forefront of the recovery amongst developed countries. We continue to favour long/short equity managers focusing on the US, Asia and Emerging Markets.

• Micro corporate factors will increasingly drive spread movements rather than more intermittently coming to the fore as at present. However, for the time being, they continue to be influenced and dominated by macro factors.
• Valuation anomalies persist in the pricing of securities within the capital structure of corporates in both investment grade and high yield bonds. These opportunities persist across sectors and geographies.
• Long exposure to restructuring situations could continue to be beneficial to returns, although as prices improve so the potential for volatility increases.
• Differentiation in credit quality, continued valuation anomalies and potential for further stress continue to create a plentiful opportunity set, albeit within a more difficult trading environment.

• Future curve movements present good trading opportunities for the next quarter. There are significant growth disparities between regions and countries which are not adequately reflected in bond markets. Cross market and relative value trading should therefore pick up.
• Future currency movements could revert to being driven by global differences in the financial strength of countries and their consumers. It is therefore likely that Macro managers will further short the euro and add to exposure in Emerging Market and Asian currencies as trends become increasingly established
• Currency volatility remains higher than average and will thus provide further opportunities for traders.

• Merger arbitrage spreads have continued to provide a steady source of returns for even driven hedge fund managers but returns would benefit from a greater number of deals and wider spreads.
• Multi-Strategy Event Driven managers that can be selective across a wide range of opportunities in merger arbitrage and credit securities, across the capital structure including distressed, continue to be favoured.
• While there continue to be risks in both the equity and debt markets, pricing levels are now more favourable and upside potential in certain deals has increased. Managers in this strategy are able to capture gains from idiosyncratic events which have less dependency on market conditions.

• Managers in this strategy will continue to trade the "lower for longer" theme but trading opportunities at the front end of curves are now much more tactical and offer less upside.
• The recently increased level of bond volatility has improved the opportunity set for trading orientated managers.

• In Q2, the strong trends and rising exposure to fixed income markets were the drivers of performance in this strategy.
• Managers with medium to longer-term models in this strategy could be better in line to benefit from greater trends emerging. However, with the recent exception of movements in the fixed income markets, conditions have once again become more choppy, range bound and subject to reversals in the equity, commodity and foreign exchange markets, making them more suitable for managers with short-term models.#

Corporate website: www.iam.co.uk

- FG