Having reduced its exposure to risk in global equities on 21 April 2010, HSBC Private Bank is maintaining its highest conviction overweight in hedge funds in the belief that hedge funds are well positioned to profit from the current market conditions and higher volatility.
Fredrik Nerbrand, head of global strategy at HSBC Private Bank, says: “In contrast to the majority of 2009 in which investors were rewarded for taking on risk, we believe 2010 will be a rather different environment – a year of differentiation where equity and bond markets are likely to be lower than they have been since March 2009. Therefore, it will be more difficult for investors to make money just by being ‘long’; other strategies need to be implemented to increase expected portfolio returns.
“Hedge funds are traditionally well placed to look at relative value between assets and to exploit pricing anomalies. They also tend to be good at taking advantage of higher volatility in the markets, which we are currently observing. Selecting hedge funds with a good track record in relative value and volatility strategies, however, is essential and this is where HSBC Private Bank benefits from the strength of its research capability and commitment to a thorough due diligence process.”
Peter Rigg, head of alternative investment group at HSBC, adds: “As discussed in our last investment outlook, 2010 is proving to be a year of differentiation with macro-economic and sovereign concerns impacting asset class performance. The sovereign debt crisis that started in Greece spilled over into equity and credit markets last month, despite considerable efforts by the IMF and the ECB to stem the contagion. In addition, concerns about Chinese tightening are weighing on investor sentiment.
“In this environment, managers that have been defensively positioned for some time performed well, taking advantage of macroeconomic and regulatory opportunities in the financial, healthcare and materials sectors. Long volatility strategies also benefited from a broad opportunity set as implied volatility in equity and foreign exchange markets spiked.
“Discretionary macro remains our highest conviction strategy and we expect managers to continue generating above-average returns for the foreseeable future. Our view has, if anything, been reinforced by the events of May. The dispersion in the timing of interest rate moves between the emerging markets and the developed world, and the potential divergences within the Eurozone are creating long-term trading opportunities for this strategy.”
