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Hedge Fund Strategies Well Positioned for the Uncertainty of 2021


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Publication Title | Hedge Fund Strategies Well Positioned for the Uncertainty of 2021

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“Given the lingering uncertainty surrounding the COVID-19 health crisis, the development of a vaccine, geopolitical events and governments’ policy response, we favor nimble, shorter-term strategies. It is prudent in our minds to remain somewhat conservative, but to seek opportunities within alternative investments with low correlation to broader risk assets.”
Discretionary macro managers are well-positioned, in our view, because macroeconomic events are likely to remain a leading market driver. Developments surrounding the health crisis, geopolitical negotiations and fiscal policy spending decisions around COVID-19 stimulus and inflation policy will likely continue to create market fluctuations and opportunities.
Long/short equity strategies may benefit from their ability to capitalize on both improving and weakening trends driven by the dispersion and volatility of pandemic-related disruptions and events. We also believe long/short credit managers could take advantage of the potential for an increase in company bankruptcies and bond defaults. We saw this during the March 2020 selloff, and while unprecedented stimulus efforts from global central banks have kept interest rates low and helped maintain liquidity, we are concerned that their effectiveness may wane in 2021.
One of the core themes behind this thinking is reflation. The US Federal Reserve’s shift toward flexible average inflation targeting represents the central bank’s latest effort to drive stubbornly
low inflation higher. That commitment, echoed by other central banks, may work in conjunction with potential increases in
fiscal spending for infrastructure, vaccine news and renewed economic growth to lift expectations for future inflation, prompting a steepening yield curve and a weakening US dollar.
Besides reflation, we are monitoring regulatory and tax policy shifts that could cap the rally in technology and health care stocks. We are also looking toward hedged strategies with a focus on recovery in Asia and emerging markets.
Looking Ahead, Post-Election
While the US elections are largely in the rearview mirror, it is still early to clearly envision the policy impact of the new administration, in terms of potentially higher taxes, shifting health care benefits, or regulating fossil fuel producers and technology giants. That said, President-elect Joe Biden’s views on traditional energy, information technology and health care costs indicate that these sectors may lag the broader market going forward. Conversely, industries within clean energy, industrials and
Brooks Ritchey
Senior Managing Director Co-Head of Investment
Research & Management K2 Advisors
Robert Christian
Senior Managing Director Co-Head of Investment
Research & Management K2 Advisors
December 2020
Outlook for Hedge Fund Strategy Investing
Hedge Fund Strategies Well-Positioned for the Uncertainty of 2021
Wide fundamental variances in valuations and growth prospects for various asset classes, geographies and sectors, often accelerated by the pandemic’s impact, defined the opportunity set for hedge fund-based strategies in 2020. Looking ahead to
2021, that divergence could well narrow, driven by catalysts such as reflation efforts, a weakening US dollar and the possibility of widespread changes in regulatory policies.
We see increasing signs of a potentially sustainable rotation in
the coming months, in which managers buy or add to sectors and markets that have lagged in recent years (and through the pandemic), while taking profits or applying hedges where they believe the good news has been priced into valuations. Staying on top of those rotations will likely be the key to strong performance potential. Nimble managers may look to a recovery for energy
and raw materials, such as base metals that could benefit from Chinese growth. Others may de-risk in the United States and
add to emerging markets. The ultimate driver could be one or more vaccines—which could be a game-changer, even if they are not adopted or available right away—or some other clear sign
that global growth is recovering.
Finding Opportunities amid Uncertainty
Over the next 12 months, we believe three hedged sub-strategies are likely to perform well and improve their risk/reward ratio.
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