Hedge Fund Advisor Talks 2014: Bullish On L/S Managers, Bearish On Fixed Income

Dec 5 2013 | 1:01pm ET

By Ronen Schwartzman
Founder, Ten Capital Advisors

2013 is about to end and it is clear to see it was a great year to be invested in the stock market. The S&P500 is going to have a 20%+ return this year and is on its way to finish the year above 1,800; the Nasdaq is trading above 4,000 level for the first time in 13 years. 

A few reasons are responsible for the rally in equities this year: the low interest rates environment pushed investors to risky asset investments (stocks), the continued quantitative easing program by the Fed and the continued slow and improving economy.

However, we all know that past performance is only a guarantee for past performance.  As we are less than a month away from the New Year, we would like to share with you our initial thoughts for 2014:

1. We like long-short equity managers with a moderate net exposure. We believe the low interest rate environment will continue to exist in 2014. This means that savings accounts in the bank will continue to pay very low interest rate (25-40bps), which in return will continue to push investors to the stock market as they don’t want to miss the train of rising stock prices. Many corporations are engaging in shareholder friendly activities such as share buybacks and dividend payments and in return they are seeing their share price increase; investors prefer to own stocks that are paying them a 3% annual dividend yield that has a more favorable tax treatment than just a plan vanilla investment grade bond that locks their money for five years with an unattractive yield. Furthermore, we think housing prices will continue to recover across the country and that will increase overall GDP. It will also positively impact investors’ wealth and eventually should work in favor of stocks. However, we also think it may not be a straight line of rising markets next year. We think that once Janet Yellen becomes the head of the Federal Reserve early next year that tapering will take place and with that potential short term correction in the markets along with a rise in interest rates. However we will see that as a buying opportunity since tapering means an improvement in the underline economy. In order to best position ourselves we like long short equity managers that are running a net exposure of 20-50%, which means they should participate in the upside move of the market but when correction will come they should be able to protect capital better than a long only manager that has a full exposure to the market. 

Within equities we like the following sectors:

• Healthcare – The healthcare sector has an increasing importance in our lives and it seems that costs associated with it are constantly rising. “Obama care” will begin next year and with that there are ample of investing opportunities and change to come to the sector, which should work well for managers focused on the sector.
 
• Technology – There will always be innovation and change in this space. The IPO market seems to be opening and bringing new companies to the public world. While some of these will trade at unreasonable valuations, others will justify the multiples they will be trading at. There will be plenty of investing opportunities in the sector.
 
• Financials – The banking system is the backbone for any economic system. As the U.S. economy continues to improve the banks should do better, either via providing credit to corporations, loans to consumers, or mortgages, etc. 

2. We continue to be underweight in fixed income. We think interest rates are about to rise next year and we believe that buying the 10 year U.S. Treasury at 2.75% is bad investment. We dislike the returns on investment grade bonds and also think that investors are not rewarded for the risk they are taking in the high yield space. Moreover, we think that once the Fed tapers during 2014 we will see a quick rise in interest rates that will cause capital losses to all the fixed income investments. In order to protect ourselves, we prefer to keep short term holdings in the bond space and to have floating rate bonds as a hedge against rising interest rates.

3. We like event driven managers. Event driven managers have the capability to invest across the capital structure of the company. On the equity side we like them because they are investing in companies that are going through change (change in management, spin off, change in balance sheet, etc.) and as such they should be uncorrelated, for the most part, from the overall market. On the debt side we like them because they can analyze and dissect the balance sheet structure of a corporate and realize when a company might have to refinance and thus will know which debt tranche they should own. They can also engage in capital structure arbitrage and go long one part of the capital structure (senior secured for example) and be short another (unsecured debt for example) and benefit from that.

4. We continue to be underweight commodities. We think the glory days of the commodities sector are behind us. The tremendous construction and infrastructure growth we saw in emerging markets such as Brazil and China from 2000 to 2008 is not going to repeat itself anytime soon and as such we are not excited about the sector.

I think the best way to describe our approach for next year is proceed with caution. While we are excited about the equity space, we are also mindful of the new highs the markets have made this year and that a correction may occur in 2014. Happy New Year!

Ronen Schwartzman is the founder of Ten Capital Advisors, an independent New York based hedge fund advisory company focused on providing customized solutions to its clients regarding their investments in hedge funds. 


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