Hexam Capital Partners has moved its absolute return funds into aggressive net short positions over concerns that global markets are rallying hard because of 'greed and fear' rather than purely short-term fundamentals.

Marina Akopian, manager of the Resolution Hexam EMEA Absolute Return Fund, and John Payne, manager of the Resolution Hexam Global Resources Absolute Return Fund, have adopted 40% net short positions due to their belief that markets are not pricing in the potential for interest rates to rise across the globe - an event likely to put liquidity under strain.

Akopian and Payne say a liquidity crunch in the US, in particular, would trigger a global sell-off with emerging markets and their developed peers now highly correlated, as illustrated by the worldwide shocks of May 2006 and February 2007. They believe the chances of the 'shock' scenario coming to fruition will increase as evidence mounts that interest rates in the US, Japan and Europe could be raised.

Such rises would be particularly dangerous because the majority of EMEA markets have recently reached all-time highs on below-average volumes, as measured by the previous five years of data.

Akopian said: 'The latest rise in markets is not due to benign global markets. There is still no clear indication where the US economy is going so it appears that markets are rising simply because investors are willing it to. It's largely sentiment. The pricing of risk has, for now, gone.

'If inflation across the globe keeps rising, then markets could get a shock. For us, this rally appears to be driven by a mixture of greed and fear - investors at the moment are simply worried they might miss out on rising markets.

'Nevertheless, we remain big bulls of emerging markets over the medium and long term. No other asset class will be able to generate such strong returns over the next 15-20 years - certainly no developed economy can match the growth that emerging markets are offering.'


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