Pictet Alt Advisors scores with China market rebound, but offers warning on SPACs

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Pictet Alternative Advisors says China offers a “very conducive environment” for hedge fund managers, which has helped drive returns over the past year as markets there rebounded from the coronavirus outbreak. 

In a media briefing on Thursday morning, Pictet Alternative Advisors – which has some USD32.6 billion of assets under management, USD11.2 billion of which is in hedge funds – highlighted several key themes, including SPACs, data, ESG and portfolio balancing, that are helping shape investment decisions.

Heinrich Merz, head of hedge funds at Pictet Alternative Advisors, pointed to the booming opportunity set within China-focused hedge funds and the development of underlying market structures there. “The local skillset and investment processes are much more attuned to what institutional investors are after,” Merz explained.

Nicolas Campiche, CEO at Pictet Alternative Advisors, said the Chinese allocations in its portfolios have been among the best contributors to performance last year.

“We always had a keen interest in hedge fund managers based in Asia. Last year the Chinese market, and in particular the tech market, performed extremely well,” Campiche observed. “What’s impressive is that some of those managers managed the turnaround in trends at the beginning of this year.”

Merz hailed the way Chinese managers generated alpha on both the long and short side, and rotated their portfolios as the opportunity set evolved in 2020.

He said: “That control of risk and those investment processes really shone through last year. As the initial impact reverberated, with Chinese markets [among] the first to be impacted, we saw managers very effectively control risk and then re-increase their portfolios and their positioning and rebound over the rest of the year.”

Campiche said Pictet is now deploying more resources in Asia, with China a particular focus. “It’s a very conducive environment for a hedge fund manager. It’s less crowded; it’s a great playground; there is plenty of opportunity on the long and short side, and we are continuously investing from both a portfolio standpoint and an organisation standpoint.”

Elsewhere, Merz also pinpointed the importance of robust portfolio construction in order to deliver consistent performance, both during the Covid crisis as well as going forward into the next few years as global economies recover.

He said equity long/short managers and macro managers in Pictet’s portfolio have been acting as “counterbalances to each other” recently as inflationary risks and concerns resurface.

“As those ebb and flow, we find from one week to the next that we may have equity long/short, particularly technology-focused managers, struggling while macro managers with their reflation trades kick in, and then vice versa as those inflationary concerns ebb again,” Merz said.

“In order to control or minimise tail risks, there really is no substitute for solid portfolio management and combining those alpha sources in a correct way.”

On the downside, growth-focused long/short managers offer a lower risk/reward, as work-from-home trends fade and underlying managers cut positions in those names which were either winners or losers in the pandemic, while certain emerging market-focused managers may also face challenges.

The pair sounded a note of caution on SPACs, which have experienced “frothiness” as the sector has become a key focal point for hedge funds over the past year. Specifically, Pictet has approached the sector from an arbitrage perspective, which has proved “fruitful” for managers, but is an exposure that is now decreasing.

“It’s not an accident waiting to happen — it’s already happened,” Campiche said, noting that some 80 per cent of SPACs are now trading roughly 40 per cent below their high.

They also touched on certain other evolving trends in 2021 so far, including the “substantial” rebound in quantitative trend-following strategies, which had been upended by the pandemic, as well as the rise of ESG, decarbonisation and sustainability as key analytical metrics for managers and investors.

Longer term, data and AI in investment processes are being integrated to an ever-greater degree, Merz said. “It’s very rare to find a hedge fund – even a traditional fundamental equity long/short fund that has not implemented and hired data scientists, and begun to implement more quantitative processes,” he observed.

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Hugh Leask
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