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Don Steinbrugge, founder and CEO of Agecroft Partners, LLC, believes that rising short term rates could have a positive impact for a few hedge fund strategies, including CTAs, reinsurance, and short term relative value fixed income. Furthermore, he says, strategies that benefit from rising interest rates will grow their market share of the hedge fund industry at the expense of other strategies. And if short-term rates continue to rise, he expects to see more institutional investors asking for a performance hurdle for the carried interest portion of performance attributable to the cash position of the portfolio:
As inflation reached a 40-year high last month, the Federal Reserve increased its target range for the federal funds rate by 25 bps and projected six more increases for 2022. Currently, the Fed funds futures market is pricing in approximately 270 basis points of increase for 2022, surpassing the 250 basis point increase seen in 1994. Deutsche Bank's chief economist recently suggested that the Federal Reserve could increase short-term rates to as high as 5%.
Most people associate rising interest rates with declining asset values. This is certainly the case in fixed income markets, where there is an inverse relationship between rising interest rates and bond values, whose sensitivity to interest rates is measured by duration. This relationship also generally applies to equity valuations, though...................... To view our full article Click here
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