Hedge fund managers are singing much the same optimistic refrain for 2017 as they did for 2016, but with much more conviction and a nod to President-elect Donald Trump for setting the stage for the kind of rough markets in which their strategies will thrive.
At the top of managers' new year's expectations is much higher volatility coupled with lower cross-market correlations and higher stock dispersion in global markets, which is almost exactly what they predicted for 2016.
Hedge fund manager wishes stand a good chance of being granted next year through the potent combination of European political uncertainty, mismatched global economies, less quantitative easing, higher interest rates and increased market risk that will characterize the coming year, according to the prognostications of most of the executives interviewed by Pensions & Investments about their expectations for 2017.
Despite widespread anticipation of large-scale change, there's an element of back-to-the future for hedge fund managers, observers said.
“At a high level, the 2017 themes are the same as last year, but their likelihood of success is stronger and manager conviction much firmer,” said Jon Hansen, managing director and hedge fund specialist based in the Boston headquarters of consultant Cambridge Associates LLC.
The beginning of 2016, especially the first quarter, was very tough on the hedge fund industry, resulting in disappointing performance and very low morale, Mr. Hansen said. But by midyear, performance had started to rise along with morale and investment opportunities.
The same broad elements of 2016 hedge fund success likely will be enhanced and strengthened in 2017 given “the much more favorable environment” under a Trump presidency, Mr. Hansen said.
Those key pieces include high equity dispersion; normalization of interest rates that is a return to “the true cost of capital ... monetary (easing) policy is a challenge to hedge fund managers;” and pockets of elevated volatility generated by fiscal or trade policy reform or market movements that “generate a return for your research and security selection,” Mr. Hansen stressed.
“More deregulation than at any other time since (Ronald) Reagan's presidency is certainly on the agenda,” predicted Michael Hintze, CEO and senior investment officer of credit specialist CQS (UK) LLP, London, in his annual outlook report to investors.
The degree to which quantitative easing will continue — a top-of-mind macro trend for many hedge fund managers, sources said — is a matter of where in the world you look, said CQS' Mr. Hintze in his report.
“In the U.S., further QE is over for now and it seems to me that the appetite for QE is waning in the U.K., although the eurozone, China and Japan continue to run accommodative monetary policies,” Mr. Hintze said.
CQS manages $12 billion in a variety of hedge fund and long-only credit strategies.