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Saturday, 21 January 2017
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Jan 3 2012 | 5:19am ET
Nobody can say for sure what lies ahead, but FINalternatives Senior Reporter Mary Campbell asked some industry experts to give us their best guess as to what 2012 will bring for markets generally—and hedge funds in particular. Here’s what they had to say (Part I of III):
Founder, Nariman Point
"We believe 2012 will be a difficult year for the global economy. First, I believe the problems in Europe will prove to be too large for the bureaucrats to handle, resulting in a significant global crisis. Secondly, de-leveraging by U.S. companies will create a balance sheet recession in the United States that will be supported by retiring baby boomers in the U.S. and across the developed world, leading to low to no growth. Lastly, I think China will have a much needed correction which may destabilize Australia and Japan's manufacturing sectors. Japan's debt problems may also come into view if borrowing costs for Germany continue to rise as a result of contagion.
"On the bright side, I think the crisis of 2012 will break the link between emerging markets and the developed world, and be an amazing opportunity for investors to buy EM and commodities."
Global Head of Alternative Products Development, PIMCO
"Financial system deleveraging continues to create significant investment opportunities for alternative portfolios. There remains an historic imbalance between the liquidity needs of the world’s largest financial institutions and the amount of private capital available to participate.
"As economic growth continues to decelerate in 2012, the zero bound will hamper developed world monetary policy, leading to increasingly less conventional policy responses which PIMCO expects to create large dislocations in the interest rate and currency markets.
"The European Banking Authority's requirement that European banks create a 9% Core Tier 1 capital buffer by June of 2012 is already creating significant investment opportunities in credit. Unlike many other recapitalization efforts by regulators, where the regulator gives a target and forces capital to be raised either from the state or the market, the EBA has only provided a capital ratio target (with no state capital), which will likely lead to continued dispositions of assets from bank balance sheets at very attractive prices.
"Three very attractive credit market premia persist for alternative investors: liquidity, ratings, and complexity. The re-regulation of banks has removed a major source of liquidity for markets. Providing liquidity to large sellers of even the highest quality bonds is earning larger than ever yield compensation. Mortgage credit remains especially ratings-impaired. The flexibility to ignore traditional credit ratings adds significant value to mortgage portfolios. This is an area where PIMCO has been extremely active. There are significantly fewer investors in the post-crisis world with sufficiently deep teams to analyze and trade complex structured cash flows. Complexity carries very attractive yield premiums, especially in structured credit."
Managing Principal, NuWave Investment Management
"We anticipate significant structural changes to the global economy in 2012, as the Eurozone crisis will undoubtedly come to a head (with the result being either a more coordinated fiscal union or the death of the euro), the United States will continue to grapple with its own fiscal deficit, and China will experience a rather bumpy (if not hard) landing—all of which should provide significant opportunities for “long volatility” divergence-oriented strategies."
Patrick P. Campo
Partner, Alternative Investment Management
"While we believe volatility will continue in 2012, we do see good opportunities in select strategies in this environment. Long/short equity managers who are experienced in shorting and nimble credit managers will excel. We have been seeing some of our highest conviction managers open for additional capital at year-end. Additionally, we are seeing some promising new, smaller hedge fund managers. While new launches will be approached with caution, spinoffs from larger established funds will be more favorably viewed.
"Private equity as an asset class will also be strong, particularly in the small-middle market buyout arena. Smaller buyout firms that can add operational value post-close and that do not rely on leverage to generate returns will be attractive. As far as geographic opportunities, a long-term, private-equity approach will be the most prudent way to best capitalize on the coming European distressed cycle, as both the timeline and the volume of asset sales remain unclear."
Partner, SNR Denton
"[The] DOJ and the SEC vigorously maintain that they conduct separate investigations. However, almost without fail, they file their charges against the same defendants arising out of the same alleged conduct on the very same day. Of course, that is not hot news. However, there has been a substantial and newsworthy change in the way in which the United States District Court for the Southern District of New York—the Federal Court that hears many of these cases—is handling them. Until recently, SEC and DOJ cases filed in SDNY were handled by different judges. Not anymore. Now, one judge will oversee both cases. These single-judge cases bear watching and raise many questions such as: Will having one judge help insure that potential government abuse of the allegedly separate yet remarkably timed charges is stamped out? Will one judge be able to achieve more efficient global resolution of cases in a manner that does justice, provides for more timely compensation to victims, and avoids the remarkable and wasteful duplication of first starting an SEC action from scratch after a lengthy criminal proceeding has finally concluded?"
Senior Vice President, Product Development, SSARIS Advisors
"Our view for 2012 is that clients and consultants will continue to drive toward unique alpha and increased focus on hedge funds that have moved back to the traditional role of hedging market risks in their overall portfolio. We have seen a move away from ‘absolute return’ as one broad category and clients have become more specific about the role hedge funds are asked to play within a portfolio. This focus demands transparency and liquidity that allows a more exact match. Further, there will be continued effort to increase offerings in the 40 Act space that will broaden the reach of hedge funds into the retail space."
Managing Director, Alternative Investments, Direxion
"Most investors are concerned that market volatility levels will remain high well into 2012 and are uncertain about how it will impact their investments. Many of these investors remain unaware that alternative strategies such as long/short currencies and managed futures, and long/flat commodity strategies can offer benefits in these unstable markets. The proven ability for these strategies to provide portfolio stability, regardless of whether prices in their assets classes are rising or falling, differentiates them from long-only constrained investing. The current situation with the Eurozone and the fear of a global economic slowdown should generate continued volatility within commodity and currency markets, making it as important as ever to employ a dynamic strategy (as opposed to long-only) in 2012.
"We believe that in today’s markets, investors should seek further diversification by making alternative investment strategies a static component of their portfolios, but this is particularly important as this uncertainty continues. Having investments that can perform independently from stocks and bonds is a good strategy for next year and beyond."
CEO & CIO, 2100 Xenon
"2012 will be a year of uncertainty and retrenchment in global markets. Attempts to liquefy the European banking system will ultimately fall short because nationalism will take precedent over economic stability. Germany will ultimately refuse to provide the liquidity necessary to support the euro, and the United States will be unwilling to make up the difference. Italy and Greece will be unable to meet their austerity goals, especially their budget deficit goals, and their credits will suffer. Rating agencies will downgrade Eurozone countries, including Germany, and the equity markets will rebel. Meanwhile, the United States economy will be frozen due to uncertainty surrounding the presidential election, which will be closely contested, especially given the fact that the economy will fail to generate sufficient jobs. In the end, 2012 will collect the debts owed from the crisis of 2008."
Principal, Benchmark Plus
"Institutional investors continue to struggle with a high-volatility, low-interest rate environment with underfunding and high actuarial return assumptions only further compounding their dilemma. For many, the memory of 2008 coupled with the continued concerns surrounding Europe has created a 'risk-on/risk-off' investing behavior that has limited the diversification benefits from traditional asset allocation. Starting in 2011 and likely accelerating during 2012, we have seen investors incorporating long/short equity funds into their equity allocations in an attempt to both 'de-risk' their portfolios by dampening equity volatility while still meeting their actuarial return goals."
CEO, Casey Research
"The biggest opportunity of 2012 is also the biggest threat: the global debt super-cycle hitting crisis levels on three continents simultaneously. A deteriorating European debt crisis, economic downturn in China, tension in the Middle East, continued stagnation in Japan and growing debt in the U.S. will create the perfect storm that will force investors to find the best places to invest. Rough waters include a growing U.S. deficit with no political will to make the tough choices, a worsening European debt crisis that threatens to unwind the euro and slow trade and cracks finally appearing in the “China miracle” that built an economy on a pile of debt that vastly overshadows the U.S.’s problems. As Europeans and Chinese experience their own issues, the U.S. will have an increasingly difficult time finding buyers for their 0% interest rate debt. The Fed will ultimately be forced to buy and monetize much more of their government debt and inflation will pick up pace. Where to invest? Continue to put physical assets in gold, diversify debt and equity outside of the U.S., and look for select, speculative opportunities that rise out of the volatile situation: long gold mining stocks, long agriculture, short Japanese debt, short select euro deb-exposed banks."
Looking Ahead: The Hedge Fund Industry Speaks