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Fourth-Quarter hedge fund strategy outlook from K2 Advisors: Favorable dispersion presents opportunity

Tuesday, October 25, 2016
Opalesque Industry Update - K2 Advisors writes on Harvest Exchange - for US investors only:

Dispersion in valuations, dispersion in security prices, dispersion in currencies, dispersion in earnings. The point is, ladies and gentleman, that dispersion—for lack of a better word—can be good for hedge strategies. No, we are not talking about “greed” (thank you, Gordon Gekko), but as we look toward the fourth quarter of 2016 and identify our top convictions for the remainder of the year, we are most definitely talking about dispersion; or more specifically, increased dispersion. For hedge strategies, this can indeed be a good thing.

When considering statistical measurements that are significant in terms of the efficacy of any active investment—and the ability of hedge strategies to capture alpha—the first that often comes to mind for investors is correlation. While correlation is an important measure—it only tells part of the story. Dispersion is a significant part of the narrative as well. While correlation can show the directional movement of a stock or asset relative to others, it does not indicate the magnitude of that movement. The magnitude of movement is demonstrated by dispersion—and this is implicitly a meaningful factor in terms of the ability of hedge-strategy managers to capture alpha. In a high-dispersion environment stock prices can vary significantly, which, in theory, would allow skilled fundamental stock-pickers to differentiate themselves greatly. In a low-dispersion environment it is less common for stocks to move substantially against each other, despite any idiosyncratic fundamental changes that may be present.

Continue reading the following chapters on Harvest:

  • Opportunities for Long Short Equity Hedge Strategies
  • Tailwinds for Merger Arbitrage
  • Global Macro: Emerging Markets

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