With 2020 on the horizon and fears of a recession looming, SkyBridge Capital Co-CIO Troy Gayeski explains why he believes the economy tied to the US consumer is still in good shape and what investors can do to maximise returns while protecting against a potentially more volatile market in the year ahead.
SkyBridge Capital – the 2019 winner of Hedgeweek’s best fund of hedge funds – serves a diverse pool of investors spanning institutions, accredited investors and sovereign wealth funds and for nearly 15 years, has used “alternative thinking” to generate long-term value and returns.
Describe your investment approach and how it differs in the marketplace.
Unlike most hedge funds, SkyBridge is actively involved in the management of investments, making changes in tandem with the broader macro environment.
While many firms apply equally weighted allocation across all major hedge-fund strategies, we believe we can create greater value through a repeatable and thematic approach. This involves a disciplined process for manager selection, appropriate levels of theme and manager concentration, and a dynamic evolution of the investment portfolio. By engaging with external managers for specialised trade executions rather than relying on internal trading teams, SkyBridge operates more like a multi-strategy hedge fund as opposed to a fund of funds.
Given the strong economy, how does SkyBridge ensure its clients are benefitting from the robust market cycle while still diversifying and protecting against unnecessary risk?
Despite the talk of an imminent recession, consumer-based indicators are strong. The US consumer is spending at a healthy pace while simultaneously increasing savings and deleveraging balance sheets. This is the sign of a tight labour market and meaningful wage and income growth. For these reasons, we believe that alternatives tied to the US consumer – specifically residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) – and regional/community banks look to be the best bet for investors who want to diversify without missing out on the potential gains of an otherwise robust economy.
Why are hedge fund strategies a good choice in the current economy and in 2020?
As we approach 2020, we recognise that there are reasons to remain cautious; a slowdown in economic growth in the United States and globally, and near-record highs for valuations in equities, bonds and corporate credit. But despite several factors to keep an eye on – a combination of contracting business-fixed investment, inventory liquidation, and the potential for labor market deterioration – we still see a much higher probability that the current expansion continues, though at a less-robust pace. Big picture, we put the chances of a recession at one in three, and the probability of muddling along or rebounding due to a détente on trade at two in three.
We’re in a tough environment for plain-vanilla investments. In most situations, the investor will be left with modest returns at best and could suffer material losses. We believe a more thoughtful approach is to diversify with alternative investments which perform somewhere in between stocks and bonds, offering the potential for consistent returns with far less volatility.
Troy A Gayeski, CFA, is a Partner, Co-Chief Investment Officer and Senior Portfolio manager at SkyBridge Capital, a global alternative investment manager that provides a range of investment solutions, including commingled funds of hedge funds products, customised separate
