Outlook “bright” for hedge funds as industry seizes on surging volatility, JP Morgan Asset Management officials say

Brighter skies

The immediate outlook for hedge funds is “very bright”, with elevated volatility at an “optimal” level for macro and relative value strategies in particular, JP Morgan Asset Management’s alternatives team said this week.

Jamie Kramer, managing director and head of the Alternatives Solutions Group at JP Morgan Asset Management, said many hedge funds were able to insulate investors’ portfolios during the Q1 market shock before taking advantage of rising markets during Q2’s rally.

That showing is now piquing investors’ interest, following a sustained period of allocator aversion in recent years.

“Facing a decade of headwinds with low interest rates, low dispersion, [hedge funds] now really are in this goldilocks scenario of being able to protect-and-participate,” Kramer said.

In a deep-dive webinar discussion on Thursday, private market experts at JP Morgan Asset Management explored the role of various alternative asset classes in portfolio diversification, against the current market backdrop of low bond yields and Covid-19 uncertainty. 

The discussion flagged up hedge funds as one key strategy that has come up during recent client conversations much more compared to recent years.

New York-based Kramer told the discussion that although Q1 proved to be the fifth-worst quarter for global equities in 50 years, Q2 was the third-best, as dispersion across markets and sectors surged and alpha opportunities grew.

“Hedge funds provide correlation when you need it the most. If equity markets are going up, what’s wrong with being a little bit highly correlated and getting a return?,” she remarked.

Looking ahead, she believes current volatility levels are in the “optimal” environment which gets many hedge fund investors “very excited.”

Kramer said macro and relative value hedge fund strategies are particularly well-placed to capitalise on elevated volatility, pointing to continued uncertainty around the coronavirus pandemic, the upcoming US presidential election battle, increased inflation risks, and an anticipated steepening yield curve.

New data from Preqin shows that hedge fund performance plummeted more than 10 per cent in Q1, before generating an 11.48 per cent return in Q2 – the industry’s highest quarterly gain since 2009 – meaning the industry has now broken even at 2020’s midway point.

“The outlook for hedge funds looks very bright to us, from both a diversification and a return-enhancing portfolio perspective,” Kramer said.

But she stressed that opportunities still vary considerably, and manager selection among investors remains key.

The challenge for many investors is how to incorporate alternative strategies into portfolio construction. She added JPM approaches portfolio construction very much from an “outcome” lens.

“We care more about what alternatives do in a portfolio, rather than what they are, because they vary quite tremendously from one manager to another,” Kramer explained.

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