Sun, Mar 29, 2020
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Time to reinforce neutral fund allocations

Monday, March 26, 2018
Opalesque Industry Update - Regarding trade, markets had remained confident thus far before abruptly correcting this week as the U.S. moved against China. After 7 months of investigation, Trump announced tariffs on about 1300 Chinese products worth $50bn to $60bn (about 2% of Chinese exports), in tech, transport, health care - for which undue technology transfers from U.S. firms to Chinese ones are suspected the most.

The U.S. will also file complaints against China in the WTO, and Chinese investments in the U.S. could face restrictions. While waiting for the Chinese response, the correction was broad, with the tech, healthcare sectors and key Asian suppliers' markets leading on the way down. Financials also suffered in response to weaker yields. The impact was mild in commodities. The proportionality of the Chinese response could indicate how far both sides are willing to go.

The broad exemptions finally granted on steel and aluminum seem reasonably encouraging. Hedge Funds were resilient, with the most diversifying strategies - CTAs, Merger and L/S Neutral funds taking the lead.

We think it is time to strengthen L/S Neutral funds allocation. While they faced months of challenging transversal stock rotations, we expect their environment to improve for several reasons. First, the peak in the economic momentum suggests that future stock rotations could be more macro/cyclical driven. These are easier to capture for quant and neutral funds.

Second, the return of volatility is a strong positive, the lack of which plagued the strategy for months while forcing to raise leverage.

Third, "stocks' loyalty" to their quant factors has returned. The correlation among stocks belonging to the same quant factor fully normalized. It suggests that quant stock-picking should become more reliable. Fourth, after moving in pack, the differentiation across quant factors is resuming.

Fifth, the lack of rationality, visible over the latest EPS season, between stock returns and the quality of their earnings, is unlikely to repeat. This is an improvement for neutral strategies which tend to have a value bias. Finally, we see more short opportunities, a noticeable improvement for neutral styles.

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. PE/VC: Unicorns sometimes sting, Private equity at crossroads as rout offers deals, curbs lending, S&P survey shows sagging prospects for private equity[more]

    Unicorns sometimes sting From Venture capital firms are on a roll. Some 259 U.S. venture capital funds amassed $46.3 billion in 2019, the second highest by amount of capital raised and number of funds since 2006, according to the PitchBook-NVCA Venture Monitor. The biggest f

  2. Study: Three threats to hedge funds, Institutions seeing more private credit risks[more]

    Three threats to hedge funds From All About Alpha: A recent paper by a scholar at Tilburg University and a market participant at Robeco outlines the difficulties that the hedge fund industry has faced over the last decade. These problems arose, at least in part, from the democratization o

  3. Hedge fund Solus to close flagship investment vehicle[more]

    From FT: Solus Alternative Asset Management, one of the best known specialists in distressed investments, is closing its flagship fund after suffering a combination of heavy redemptions and poor performance. The hedge fund, which as recently as November managed $4.3bn in assets, is one of the fi

  4. Coronavirus 'possibly the biggest economic event of all our lifetimes', 'Big short' Michael Burry has a bearish bet and warns of a selling stampede, Investors' Black Death fear driving panic, says Witan Investment Trust chief Andrew Bell[more]

    Coronavirus 'possibly the biggest economic event of all our lifetimes' A former macro fund manager said on Thursday that the economic impact of the coronavirus - which is shaving trillions off the stock market and exerting a domino effect on the world economy - might be even worse than th

  5. Investing: As markets plunge, short sellers make hay, Time to buy, says GMO[more]

    As markets plunge, short sellers make hay From Institutional Investor: Short sellers floundered during the bull market. But as the market tides have turned, so too have their fortunes. "Some people haven't invested in hedge funds for a very long time," said Mark Roberts, owner of sh