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Alternative Market Briefing

How hedge funds can weather fourth quarter's choppy markets

Wednesday, October 27, 2021

Laxman Pai, Opalesque Asia:

In its latest 'Fourth-Quarter Hedge-Fund Strategy Outlook', K2 Advisors said as we move into the fourth quarter (Q4), markets are in a tug-of-war involving various good news versus bad news debates.

Hedge funds are well-placed to outperform other assets classes in a potentially choppy market environment during the fourth quarter, with commodities, event-driven and certain credit strategies faced with a rich opportunity set and strong upside potential as markets adjust to a post-Covid world.

COVID-19 cases are declining, but central banks are considering tightening monetary policy.

Earnings growth is strong, but year-over-year comparisons will become tougher. Employment statistics are improving, but supply chain constraints persist. These debates and others lead us to believe that certain hedge fund strategies will outperform in a potentially choppy environment.

Strategy highlights

Long/Short Credit: Managers engage companies directly in refinancing transactions. An accommodative primary market allows the issuer to push out maturities, lower the cost of capital, and streamline the capital structure.

"We worry that many unpredictable macro factors will continue to challenge managers as earnings are not reliably driving stock prices. Moreover, relatively high net and gross exposures of most long/short managers leave them vulnerable to market disruptions," said the report.

Commodities: Tightening supplies and an increas......................

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