Having weathered a dire 2022, many world hedge fund managers are getting ready this yr for persistent inflation and in search of publicity to commodities and bonds that carry out nicely in such an setting.
A majority of the ten world asset and hedge fund managers surveyed by Reuters mentioned commodities are undervalued and will thrive as world inflation stays elevated in 2023.
Their different high picks included inflation-linked bonds to protect in opposition to worth rises and selective publicity to company credit score, as greater rates of interest restore some differentiation in firm bond spreads.
High on their record of belongings to avoid or short-sell are equities: inventory markets have been whipsawed by the sudden tightening in financial situations final yr and lots of firms may see their earnings eroded additional in 2023.
“Equity markets seem to be pricing in what I would call the impossible trinity … that we’re going to have lower rates, we’re going to have disinflation and earnings are going to remain resilient,” Jordan Brooks, co-head of macro technique on the $143 billion AQR Capital Management, advised a convention final month.
Brooks mentioned that situation is just too optimistic and he advisable a risk-parity funding method that provides weighting to the riskiness of belongings, throughout shares, bonds and commodities.
Investment information agency Preqin estimates hedge fund returns have been adverse 6.5% in 2022, the biggest fall since a decline of 13% in 2008 in the course of the world monetary disaster. Preqin mentioned simply 915 hedge funds have been launched in 2022, the bottom in 10 years.
London-based hedge fund supervisor, Crispin Odey, who profited final yr from quick positions on British authorities bonds, is betting inflation will stay excessive. Odey’s OEI MAC fund ended 2022 up about 145% for the yr and, although he has decreased his quick place in gilts, he has remained lengthy inflation-linked gilts.
“Commodities will start to rise again. They’ve sold off very heavily and are below operating costs in many instances,” Odey advised Reuters.
“But owning sterling – if that breaks, that will be a very serious break. I don’t know when that will come, but it may.”
Most of the hedge fund managers Reuters spoke to assume long-short fairness methods will stay out of favour after final yr’s underperformance, whereas macro-driven methods that exploit volatility and could be lengthy or quick any asset will lengthen a robust run.
“We’re bullish on strategies that take advantage of volatility,” Joe Dowling, world head of Blackstone Alternative Asset Management, which oversees roughly $80 billion invested in hedge funds. “It’s the perfect environment for macro hedge funds: central bank policy divergence, interest rate differentials, geopolitical tension, bottlenecks and each country on its own. It presents a ton of opportunities.”
Macro hedge funds led the trade efficiency by November, in accordance with monetary information agency HFR, up roughly 8%.
Kevin Lyons, senior funding supervisor at abrdn’s hedge fund options, which has $14 billion allotted to exterior hedge funds, expects a gentle world recession within the yr forward.
Lyons is eager to allot extra to macro hedge funds and likewise thinks there are good alternatives in company credit score.
“If you can find a good company with a good balance sheet, chances are they’re trading at a wider spread than what they were three years ago. And you’re getting paid to sit through what could be some volatility right now in markets,” Lyons advised Reuters.
Danielle Pizzo, chief technique officer at Schonfeld Strategic Advisors, which manages allocation to a number of methods, additionally goals to focus extra on funding grade and high-yield bonds this yr in addition to commodities.
Making the bearish case for such credit score is Boaz Weinstein of the $9 billion Saba Capital Management, which has been quick European company credit score all yr.
“There is a high risk that something in the market will break…. whether it breaks because of inflation or because some sector creates a wider spread of defaults,” mentioned Weinstein. “Our base case is that credit risk is going to be challenged next year.”
Stay out of shares
Andrew Swan, head of Asia ex-Japan equities at Man GLG, a a part of British different funding supervisor Man Group, is apprehensive of firms in Asia which can be uncovered to developed markets, the place he expects inflation issues and slower development.
“We are negative on Taiwan generally, which is more exposed to global growth,” Swan mentioned.
Most hedge funds that Reuters spoke to are bearish on equities, significantly if the Federal Reserve retains elevating charges to struggle inflation.
Kenneth Tropin, the founder and chairman of the $19 billion US-based Graham Capital Management, famous that Fed funds futures are priced for US charges to peak at 5% in 2023 and drop to three.5% by mid-2024, which means the market expects inflation to chill significantly over the course of the yr.
Tropin believes that is too optimistic: whereas it takes longer for inflation to calm, the economic system will gradual.
“I am not convinced that equity prices truly reflect this erosion in earnings. I think stocks look expensive,” he mentioned.
As was the case in 2022, the correlation between particular person shares is prone to be excessive this yr, making it difficult to execute long-short methods, a few of the fund managers mentioned.
While shares fell final yr, their strikes have been managed and gradual, crushing volatility trades too.
Raanan Agus, world co-head and co-chief funding officer of Goldman Sachs Asset Management’s Alternative Investments & Manager Selection, which manages a fund of hedge funds with roughly 100 managers, advised Reuters they’re: “focused on hedge funds that are non-market or lesser market correlated.”