Man FRM: Why these hedge fund strategies stand to gain from a miscellany of market opportunities

Full spectrum

Man FRM is optimistic on what it describes as an “unusually large” spectrum of hedge fund strategies amid a growing medley of investment opportunities and themes arising from the fledgling economic recovery.

In its Q1 strategy outlook published on Thursday, Man Group’s funds-of-funds unit spelled out how a spring economic recovery, coupled with dovish central bank stances and ongoing fiscal support, will help sustain and extend the market rally, particularly in equities.

That, in turn, will likely strengthen the hand of a range of hedge fund strategies including credit, equity long/short, macro and relative value, during the first quarter.

Stronger earnings and multiple expansions are underpinning an increasingly bullish investor sentiment for 2021, particularly in US equities, with low interest rates and abundant liquidity helping to support expensive valuations.

At the same time, though, Jens Foehrenbach, Man FRM’s CIO, also acknowledged how certain “speculative excesses” in the market may potentially throw up risks further down the line this year - including sharp interest rate hikes, rotations, and policy mistakes such as a premature withdrawal of stimulus amid the Covid recovery.

“Cognisant of this bullish expectation for equity markets, we believe investors should remain disciplined around the goal of portfolio positioning, which is to provide diversification if this expectation turns out to be wrong – not to beat the market if we experience a strong year for equities,” Foehrenbach wrote in the outlook.

Long/short equity hedge fund managers can tap into stock dispersion, Foehrenbach explained, noting how there is still room for recovery in European equities relative to the US. Tactical trades around ESG themes will become increasingly important, and he suggested there is merit in “paying increased attention to managers’ sensitivity to a change in the growth/value leadership, particularly as the threat of rotations looms with record high concentration of the top five stocks in the S&P 500 Index, alongside corporate and consumer behaviour normalising.”

He added: “Given the objective of portfolios to provide diversification, we believe investors should focus on managers who can generate alpha from the changing opportunity set rather than taking a static directional bet.”

Man FRM also underlined strong opportunities across credit strategies, which have now been revised to a near-term timeframe, according to Foehrenbach.

“Covid-19 continues to have a varying impact on companies with different business models, creating winners and losers, which credit long-short managers have been able to exploit,” he said. “As economies recover, there is potential for these managers to express longs in cyclical, beaten down sectors versus shorts in companies in a secular decline.”

There remain ongoing dislocations within capital structures that have resulted in profitable debt versus equity trades, while certain areas convertible arbitrage, structured credit, and distressed debt also offer near-term opportunities for investors.

Discretionary macro hedge funds can capitalise on the potential for elevated volatility across asset classes, driven by interest rates movements in light of inflation forecasts. Experienced macro managers can also navigate investment themes arising from different rates of recovery between regions and countries, exacerbated by diverging fiscal policies, he said.

Meanwhile, Man FRM suggested the stabilising Covid situation forms the basis for renewed opportunities in systematic macro and trend following strategies, with manager innovation driving trades involving quantitative overlays in FX, low-cost trend following and systematic tail hedges.

He added: “In relative value, we are positive on both classic merger arbitrage strategies, which are benefitting from improving deal activity and sentiment, as well as broader-based event strategies with the potential to exploit both hard and soft catalyst opportunities.

“We expect quantitative micro strategies, such as statistical arbitrage and systematic credit, to benefit from ongoing stock price dispersion and reversionary forces.”