The choppy waters of 2015 have proved challenging for active hedge fund managers. Both equities and global bonds are down this year to date as measured by the MSCI World index and the Barclays Global Aggregate Bond index in US dollar terms.
Should investors expect 2016 to be more rewarding? GAM expects to see opportunities but not without risk.
“It is instructive to consider that in 2015, although performance has been below target for many active managers, the main themes we expected to see have in fact played out,” says Anthony Lawler, portfolio manager at GAM. “The US dollar was expected to strengthen especially against the euro, the yen and emerging currencies. That played out. Then European and Japanese equities were favoured over US equities and on a local currency basis, that theme played out too. However, the volatility, choppiness and crowdedness along the way proved challenging, manifesting in some losses from risk management trading and related trade timing.”
GAM expects policy divergence to remain a major theme in 2016 that will create opportunities, says Lawler. “We expect the Fed to raise rates in December and then to remain biased to do so again in 2016. This is in stark contrast to the European Central Bank, China’s PBoC, the Bank of Japan and other central banks who continue to be dovishly-biased. In particular, we are interested in what the divergence could mean for asset classes outside of currencies where crowding into US dollar long positions could hamper further US dollar strength next year, and could make the dollar price volatile and a challenge to trade again. So for global opportunistic managers we expect relative value opportunities in bonds, credit, equities and possibly currencies to be interesting.”
In addition to global policy diversion, Lawler says that GAM: “is focused on credit as an asset class in 2016. Credit selection is likely to offer attractive returns both on a standalone basis and also relative to equities in our view. Credit spreads have moved out markedly, but some of these moves reflect contagion from energy and commodity related pain and have been, we feel, overdone. We are considering increasing our credit exposure to specific themes at the expense of broad equity exposure going into 2016.”
GAM is also focused on market structure opportunities and risks for the New Year, says Lawler: “The change in market making and warehousing behaviour from banks and brokers has introduced important risks and trading opportunities. On the risk side, markets are far more prone to large price gap moves as liquidity in an instrument or market can evaporate quickly. Ensuring that your portfolio can withstand those price gap moves is important. But this change in market structure has created opportunities too. In the highly liquid sovereign fixed income markets, we see attractive opportunities where pricing anomalies are taking far longer to correct than was historically the case. That is an opportunity for fixed income relative value traders. All in all, 2016 promises to deliver some interesting idiosyncratic and relative value trade opportunities, but we are cognisant of price gap risks, crowding risks, and see less opportunity in simple long beta trades given current valuations and global growth challenges.”
