Every hedge fund manager thrives on volatility. Over recent times, central bank intervention has suppressed volatility and generally led to cross-asset class correlation; a nightmare for stock pickers.
But with the economic environment improving in the US and Europe, and with Janet Yellen, Chairperson of the Federal Reserve, intimating that rates will rise and tapering will eventually commence (although there is no clear timetable), one can expect to see market normalisation going forward; one where equities are priced on fundamentals and the risk-on risk-off environment that has plagued the markets begins to dissipate.
It is on the back of this scenario that Syz Asset Management SA is positive on macro and event-driven funds, equity strategies with a lower net exposure (in particular market neutral) and relative value strategies.
“Global uncertainties and higher volatility levels will provide good opportunities for liquid and flexible managers; in macro we favour those with a discretionary and tactical approach. Last year event-driven was one of the core themes in the OYSTER Multi-Strategy UCITS Alternative fund. It was one of the best performing strategies and we maintain a positive outlook for 2014,” explains Alexandre Rampa (pictured), co-head of hedge fund investments.
A reduction in central bank intervention should lead to wider stock dispersion and hence play to the strengths of RV and market neutral funds, as well as long/short equity funds running active short books.
“We like equity market neutral because by definition these funds take no directional view on the markets, they just take stock-specific or sector-specific views. Recently it has been difficult for long/short equity managers to add value on the short side. This year, we think they will be able to add more value by generating performance from shorts. Managers we speak to are quite excited about the short selling opportunities right now,” says Rampa. “Market neutral is the strategy we like most this year.”
Rampa confirms that event-driven and equity hedge funds in the portfolio will be slightly reduced in order to increase exposure to market neutral funds. “We will look to increase the portfolio allocation to around 15 per cent,” confirms Rampa.
“We still think corporate activity will be important in 2014. However, event-driven funds might suffer liquidity dry ups more than market neutral funds and we think the risk/reward is more attractive for market neutral. Equity Hedge managers generally maintain a net long exposure to the market and have a short volatility profile. They also tend to be long small and mid capitalisation and short larger companies. This trade has been extremely rewarding over the past years and we think it is a good time to take some profits.”
With respect to RV credit strategies, Rampa notes that going forward they should benefit from a rise in volatility driven by tapering, a rise in interest rates and the relative scarcity of market makers.
“The banks have been reducing their market making activity. There’s a huge amount of debt in the market that is sustained by demand so spreads remain tight but if rates go up, or credit deteriorates and investors start selling their credit allocations there’s no one in the middle to take the paper as a market maker. Spreads will widen. Some long/short credit managers might, in our view, take the role of the liquidity provider and capture the spread.
“Our current selection of credit managers tend to benefit from market disruptions and generally benefit from periods of panic,” confirms Rampa.
