Global hedge funds plan 2023 around inflation risk

By Carolina Mandl, Nell Mackenzie, Summer Zhen

NEW YORK/LONDON/HONG KONG (Reuters) – Many of the world’s hedge fund managers, who weathered a disastrous 2022, will prepare for sustained inflation this year and turn to commodities and bonds that perform well in such an environment. of exposure.

A majority of 10 global asset and hedge fund managers surveyed by Reuters say commodities are undervalued and should grow in 2023 as global inflation continues to rise. .

Their other top picks included inflation-protected bonds to keep prices from rising and selective exposure to corporate credit as higher interest rates restore differentiation in corporate bond spreads.

High on the list of assets to avoid or sell short are stocks. Stock markets have been hit by last year’s sudden tightening in financial conditions, with many companies likely to see even worse earnings in his 2023.

“The stock market seems to be pricing in what I call an impossible trinity… interest rates fall, disinflation hits and earnings remain resilient,” said co-head Jordan Brooks. would,’ he said. He spoke at a conference last month about his $143 billion AQR Capital Management macro strategy.

Brooks said this scenario was too optimistic and recommended a risk-parity investment approach that emphasizes asset risk across stocks, bonds and commodities.

Investment data firm Preqin estimates that hedge fund returns were negative 6.5% in 2022. Only 915 hedge funds will be launched in 2022, according to Preqin, the lowest number in a decade.

London-based hedge fund manager Crispin Oddy, who profited from short positions in British government bonds last year, expects inflation to remain high. Odey’s OEI MAC fund has risen about 145% in his 2022 year. He reduced his position short gold coins, but remained long gold coins linked to inflation.

“Commodities will start to rise again. They are selling out in very high volumes and often below operating costs,” O’Day told Reuters.

“But if you own Sterling and it goes bust, it’s going to be a very serious bust. I don’t know when that will be, but it’s possible.”

Most hedge fund managers interviewed by Reuters believe long/short equity strategies will fall out of favor after last year’s downturn, but macro-driven strategies that can take advantage of volatility to go long or short any asset We believe that our strategy will continue to perform well.

“We are bullish on volatility strategies,” said Joe Dowling, global head of Blackstone Alternative Asset Management, which oversees about $80 billion in hedge fund investments. “This is the perfect environment for macro hedge funds. Central bank policy divergence, interest rate differentials, geopolitical tensions, bottlenecks and country specifics. Offers many opportunities.”

Macro hedge funds led the industry through November, up about 8%, according to financial data firm HFR.

Kevin Lyons, senior investment manager for hedge fund solutions at abrdn, which has allocated $14 billion to external hedge funds, expects the global recession to moderate over the next year.

Lyons is keen to allocate more to macro hedge funds and believes there is also a good opportunity for corporate credit.

“If you can find a good company with a good balance sheet, they might be trading at wider spreads than they were three years ago. Be patient and you’re getting paid,” Lyons told Reuters.

Danielle Pizzo, chief strategy officer at Schonfeld Strategic Advisors, which manages allocations across multiple strategies, also aims to focus more on investment grade and high yield bonds than just commodities this year.

Making the bear case for such credit is $9 billion Saba Capital Management’s Boaz Weinstein, which has been shorting European corporate credit all year.

“There is a high risk that something in the market will fail, whether it is because of inflation or because some sectors are causing more defaults,” Weinstein said. rice field. “Our base scenario is that credit risk will be challenged next year.”

never run out of stock

Andrew Swan, head of Asian ex-Japan equities at Mann GLG, part of British alternative investment manager Mann Group, is concerned about the exposure of Asian companies to developed markets. , where we can expect inflation problems and slower growth.

“I’m generally negative about Taiwan, which is more vulnerable to the global economy,” Swan said.

Most hedge funds interviewed by Reuters are bearish on equities, especially as the Federal Reserve continues to raise rates to fight inflation.

Kenneth Tropin, founder and chairman of $19 billion U.S.-based Graham Capital Management, said Fed money futures will see U.S. interest rates peak at 5% in 2023 and reach 10% by mid-2024. I pointed out that it is priced to drop to 3.5%. Inflation drops significantly throughout the year.

Tropan thinks this is too optimistic. Inflation will take time to settle down, but the economy will slow down. “I don’t think the stock price really reflects this decline in earnings. I think the stock price looks expensive,” he said.

As in 2022, correlations between individual stocks are likely to be high this year, making long-short strategies difficult to execute, some fund managers say.

Stocks fell last year, but their movements have been controlled and slow, and volatility trading has also been crushed.

Ranan Agus, Global Co-Head and Co-Chief Investment Officer of Alternative Investments and Manager Selection at Goldman Sachs Asset Management, manages a hedge fund of approximately 100 managers. he told Reuters he does. Markets or less markets are correlated. ”

(Reporting by Carolina Mandl, New York; Nell Mackenzie, London; Summer Zhen, Hong Kong; Patturaja Murugaboopathy, Bangalore; Written by Vidya Ranganathan; Editing by Daniel Flynn)

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