For our annual Looking Ahead feature, FINalternatives Senior Reporter Mary Campbell contacted over 30 hedge fund industry professionals to find out what they think the new year will bring. Here, in their own words, are their thoughts about everything from the macro environment and credit markets to hedge fund fees the rise of retail investing.
Jason AderJason Ader
CEO and CIO, Ader Investment Management
“What got you here won’t get you there.” That phrase summarizes my investment approach at the start of any new year. Where are the best opportunities to invest globally based on valuation and risk/reward? Reflecting back on the best-performing equity markets of 2012, Mexico was a standout market in the Americas region with the Mexican IPC Index up over 28%. In Europe, the German DAX index led the region, up over 32%. In Asia, the Hang Seng index was up over 23% as of the last few trading days of 2012. Spain and Brazil were the two worst-performing markets in 2012, down about 1% and 3%, respectively, at the time of this writing.
Despite all the negative publicity about Europe last year and currently, Spain was the only European market down on the year. The Chinese Shanghai Comp and Shenzhen composite indices are both down marginally on the year which is in stark contrast to the strong Asia/Pacific market indices which are all green in 2012 and mostly up double digits.
Despite the consensus bearishness, I am bullish on Spain for 2013 and beyond. The negative headlines about Spain’s economic conditions have been widely publicized. I don’t see Spain leaving the euro, the banking system is taking steps toward recapitalizing, Spanish companies have restructured, austerity measures are in place and public market valuation levels are relatively low. Many listed companies are trading below replacement value and represent attractive risk/reward. There are noteworthy similarities to Spain in 2013 that we saw in the U.S. equity markets in 2009, a trough level for the S&P 500. For 2013, Spanish equities look attractive for investment as the downside risks appear adequately priced into most situations.
Analyst, Bernheim, Dreyfous & Co.
We think the year to come will further confirm the improvement of the macroeconomic environment since last summer. In Europe, conditions have steadily improved with the interventions of the ECB and comments from Mario Draghi. The recent deals struck between European leaders relative to Greece and the Spanish banks are yet another sign of the political will to put the crises behind.
In the U.S., the markets have welcomed Barack Obama’s re-election…Combined with encouraging economic numbers, the improvement of the political and macroeconomic environment should lead to stronger corporate activity in Europe and North America.
Corporate balance sheets are strong (healthy cash flows and record net cash), private equity funds have piles of cash to invest and financing conditions remain very favorable. We think that the key factor for M&A activity to increase is now an improvement in business confidence. If recent activity is of any indication, major trends to watch for will be the search by emerging countries' companies for key natural resources access, entry into emerging economies from developed countries' companies or consolidation operations in anticipation of the next business cycle.
Robert T. Keck
CEO & CIO, 6800 Capital
Between the continuing efforts to solve the Eurozone debt crisis and stabilize the euro, economic stimulus programs in China, Brazil, Japan and the U.S. and the end of the U.S. election uncertainty, much of the “headline” risk that has plagued many markets over the past two years is ending...Instead of being influenced by fear, uncertainty and global macroeconomic events, the economics of supply and demand as they impact individual markets should be the dominant price influencing factor, bringing an end to the high correlations among many markets that has existed over the past two years.
In the managed futures arena, returns over the past two years have been negative as the significant uncertainty produced considerable non-directional volatility, which has made trading conditions very difficult. Following such periods, however, the industry has posted positive, sometimes significant, returns as trends emerge. We expect that the coming years will be no different, particularly as the major world economies resume growing, which should create some significant opportunities in 2013 in the raw agricultural and industrial commodity markets as well as financially related markets such as interest rates, foreign currencies and stock indices, all of which are broadly represented in most managed futures portfolios.
Jack McDonaldJack McDonald
President and CEO, Conifer Group
A major theme we expect to unfold in 2013 includes the growing importance of managing and reliably storing what businesses of all types are referring to as “big data.” Hedge funds, with all of their trades, in multiple assets classes, across different regions and markets are particularly challenged by the tremendous amount of data that must be managed and utilized effectively. Increased regulation and increased demands from investors mean managers must have the ability to extract from that data the information required for filings such as Form PF, investor queries and marketing materials.
As we enter 2013, innovative managers are discovering that the previous model of large investment in systems, hardware and IT people (a heavy fixed-cost burden) can be replaced by cloud-based systems which provide data warehousing, portfolio accounting and reporting, as well as analytical resources—all at a fraction of the cost and with safer, more redundant data security.
More broadly across the industry, we expect 2013 to be a year of resurgent new launch activity. This began in the second half of 2012 and we expect it to continue into the new year. Credit strategies have done well for the last couple of years and that will likely continue. However, with immense uncertainties surrounding European sovereigns and the U.S. fiscal and monetary situation, we could all be very surprised in 2013 as to which were the best-performing managers and strategies.
Joseph MarrenJoseph Marren
President and CEO, KStone Partners
Many believe that we are entering a golden age for credit-related arbitrage and relative value strategies. Fund managers, investment committees and consultants have begun and throughout 2013 will continue to move funds into credit-related arbitrage and relative value managers. Why? Because they understand that this allocation significantly improves their portfolio’s risk/return profile. Over any reasonable time frame investors in these strategies are likely to experience risk-adjusted returns that are significantly above historic norms.
The market conditions necessary for arbitrage and relative value credit managers to be able to generate attractive returns are volatility in the credit markets and credit spreads that are above historic levels. In our estimation the probability of these market conditions occurring is very high. The European sovereign debt crisis, political turmoil in the Mideast, the trillion dollar U.S. deficit, active central banks around the globe and reduced activity by large bank proprietary trading desks are factors that are likely to cause increased market volatility in 2013. Furthermore, while central bank actions have caused spreads to narrow this is likely to be a temporary phenomenon. In summary, market conditions in 2013 are likely to produce attractive investment opportunities for credit-related arbitrage and relative value hedge fund managers.
Tim PaulinTim Paulin
SVP Product Management, Touchstone Investments
During 2012, we have witnessed growing interest in complementary strategies to traditional stock and bond investing. Macroeconomic issues, fiscal uncertainties and market volatility provided the impetus for massive net flows to fixed-income strategies along with strongly positive flows to alternatives. We believe that there will be continued interest in alternatives in 2013 in light of the uncertainty, volatility and low-rate environment.
Traditional stock and bond investments will continue to be a dominant position for the vast majority of investors. The key challenge for alternative investments providers is proper education with an objective to create lasting, loyal investors. Many advisors and investors are struggling with how to best position alternatives as a portion of diversified portfolios. How do they best complement traditional strategies? How do they contribute toward the achievement of specific investor goals? It’s unlikely that alternative strategies that have gained assets largely based on low correlation to stocks and bonds or based on other expectations will generate lasting demand. The key is to illustrate how the strategy could contribute to an investor’s endgame. Ultimately, investors care about achieving their goals. Rarely have we heard an investor utter “low correlation,” “go anywhere” or “absolute return” as a goal.
The growing trend toward solutions-oriented product development is encouraging. Many are providing answers to problems (e.g., combating market volatility, generating sustainable income, responding to changing interest rates and inflation levels) which I believe is the right direction for the industry. This is occurring through enhanced education that attempts to explain how to combine alternative strategies with traditional investments to produce a potential outcome. Solutions-oriented, diversified approaches could also be developed by marrying traditional and alternatives strategies aimed at a particular investor objective or concern. Such approaches may make investing simpler for advisors and investors as they focus on how the whole works together to achieve the objective more than how each part performs individually. There is evidence that advisors are gravitating to flexible, diversified strategies that incorporate alternative strategies. We think that this trend will continue.
(Note: Touchstone is a mutual fund company that employs hedge fund-like strategies.)
Jeff PeskindJeff Peskind
Founder and CIO, Phoenix Investment Adviser
We find that the current opportunity set in high-yield "stressed" bonds is quite compelling and should remain so throughout 2013. Interest rates and defaults are set to stay low for the foreseeable future, the Volcker Rule has eliminated our chief competitor in the space, and macro concerns have driven leveraged companies to be more conservative. We continue to find bonds trading at $65 that have ample liquidity, covenant runway and no major maturities for two-three years, even as the vast majority of credit is trading at all-time highs.
Moreover, in a continued low-yield environment where much of credit has outperformed, investors will be forced to seek returns by investing in higher volatility products such as stressed credit. This search for yield should result in the outperformance of higher beta strategies in 2013.
Greg ReidGreg Reid
Managing Director, Salient Partners
In 2012, MLPs posted somewhat lackluster total returns relative to the broad market indices with the Alerian MLP Index (AMZ) up 8.1% as compared to 15.2% for the S&P 500, as of November 30. MLP distribution growth rates were fairly strong at 7.7% year-over-year (as of Q3 2012), but MLP unit prices as a whole did not appreciat much.
In fact, the yield on the AMZ has increased from 6.1% at the end of 2011 to 6.6% as of this writing (12/10/12). Yield spreads of the AMZ vs. the 10-Year Treasury, Moody’s Baa Index, and Barclays High Yield Index all indicate that MLPs appear cheap relative to historical norms. We anticipate MLP index-weighted distribution growth in the 6.5-7.0% range in 2013. Assuming yields stay constant at the 6.6% level and growth arrives in the expected range, we forecast a total potential return of 13-14% over the next 12 months. If the yield moves back to 6.2% (where it was in October), the total return could potentially be over 20%.
We believe the major risk factors for MLPs include potential tax law changes, weak commodity prices (particularly natural gas liquids), a weak economic environment, and widening credit spreads. We feel that all of these risks are fully priced into MLPs now and they are poised for a potential rebound in January which normally averages a 4.7% total return over the last 16 years of history.
Looking Ahead: The Hedge Fund Industry Speaks