NEW YORK/LONDON/HONG KONG: Having weathered a dire 2022, many global hedge fund managers are preparing this year for persistent inflation and seeking exposure to commodities and bonds that perform well in such an environment.
A majority of the 10 global asset and hedge fund managers surveyed by Reuters said commodities are undervalued and should thrive as global inflation stays elevated in 2023.
Their other top picks included inflation-linked bonds to shield against price rises and selective exposure to corporate credit, as higher interest rates restore some differentiation in company bond spreads.
High on their list of assets to avoid or short-sell are equities: stock markets were whipsawed by the sudden tightening in monetary conditions last year and many companies could see their earnings eroded further in 2023.
"Equity markets seem to be pricing in what I would call the impossible trinity ... that we're going to have lower rates, we're going to have disinflation and earnings are going to remain resilient," Jordan Brooks, co-head of macro strategy at the $143 billion AQR Capital Management, told a conference last month.
Brooks said that scenario is too optimistic and he recommended a risk-parity investment approach that gives weighting to the riskiness of assets, across stocks, bonds and commodities.,
Investment data firm Preqin estimates hedge fund returns were negative 6.5% in 2022, the biggest fall since a decline of 13% in 2008 during the global financial crisis. Preqin said just 915 hedge funds were launched in 2022, the lowest in 10 years.
London-based hedge fund manager, Crispin Odey, who profited last year from short positions on British government bonds, is betting inflation will remain high. Odey's OEI MAC fund ended 2022 up about 145% for the year and, though he has reduced his short position in gilts, he has remained long inflation-linked gilts.
"Commodities will start to rise again. They've sold off very heavily and are below operating costs in many instances," Odey told Reuters.
"But owning sterling - if that breaks, that will be a very serious break. I don’t know when that will come, but it may.”
Most of the hedge fund managers Reuters spoke to think long-short equity strategies will remain out of favour after last year's underperformance, while macro-driven strategies that exploit volatility and can be long or short any asset will extend a strong run.
"We're bullish on strategies that take advantage of volatility," Joe Dowling, global head of Blackstone Alternative Asset Management, which oversees roughly $80 billion invested in hedge funds. "It's the perfect environment for macro hedge funds: central bank policy divergence, interest rate differentials, geopolitical tension, bottlenecks and each country on its own. It presents a ton of opportunities."
Macro hedge funds led the industry performance through November, according to financial data firm HFR, up roughly 8%.,
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