Opalesque Industry Update - Global growth should remain firm driven by economic
strength in developed markets and the backdrop is
supportive for higher equity prices. The US economic
recovery remains on track despite a drag from reduced
government spending and uncertainty about budget
resolution. Economic trends in Europe and Japan are
also positive and should benefit corporate earnings. The
major central banks are erring on the dovish side,
flooding markets with liquidity while equity risk premiums
In this context, we prefer directional equity strategies that benefit from both alpha and beta. Our favorite Hedge Fund strategies to express the pro risk theme are Long/Short Equity. Special Situation funds have also shown an ability to monetize actions such as activism, recapitalization, spinoffs and mergers.
The normalization process continues with healthy stock dispersion and relatively benign volatility. This translates into a large opportunity set for L/S Equity hedge funds to express bottom-up ideas. Talented stock pickers can benefit from both alpha returns from stock selection and beta from rising equity prices.
Global Macro funds should navigate well in an environment where major adjustments are taking place and we upgrade the strategy. The last decade’s massive capital flows into emerging markets may start to reverse as funding costs edge higher, revealing a growing differentiation across assets and regions. Central banks of vulnerable countries could need to raise policy rates to prevent capital outflows and curb inflation, putting further pressure on their domestic demand. Macro funds can express emerging market views in foreign exchange, fixed income and equities. In addition, in the developed world, the eventual normalization of monetary policy away from extraordinary measures plays into the hands of Global Macro funds.
We downgrade the L/S credit strategy to a relative underweight because of limited opportunities in the space and to emphasize our preference for other strategies. We are also cautious on fixed income arbitragers and other strategies which are vulnerable to higher interest rates in the medium term.
Lastly, we maintain our slight overweight stance on long-term CTAs despite disappointing returns in 2013. Performance drivers, such as trend and persistence, could improve once policy risks fade away, allowing the strategy to catch up.
“All in all, we believe Hedge Funds are well positioned to capture further upside for the remainder of 2013” says Jeanne Asseraf-Bitton, Head of Global Cross Asset Research.