Hedge fund managers are approaching 2018 with a high degree of enthusiasm and a craving for more volatility.
Industry executives broadly agreed that changing global economic and fiscal conditions will bring asset prices down, creating a better environment for active money management strategies generally and hedge funds in particular.
Hedge fund portfolio managers are waiting with bated breath for the volatile consequences of market disruptions, sharp shocks and abrupt revaluations likely as equity markets begin what sources said is an inevitable fall from their nearly decadelong, record-breaking streak.
Hedge fund managers are ready to deploy capital when the late-cycle U.S. equity and global credit markets reach the inflection point and begin to fall, said Jon Hansen, managing director and hedge fund specialist based in the Boston headquarters of consultant Cambridge Associates LLC.
Exactly when, where and how that inflection point and accompanying volatility will manifest themselves is impossible to predict, Mr. Hansen said, but he suggested they might not be long in coming. "We're just one event away from the (Cboe Volatility index) hitting the high teens and giving hedge fund managers what they need," he said.
Hedge fund managers said they already are taking advantage of elevated intrasector volatility in individual securities, a pattern they expect to continue and expand in 2018 as global markets normalize in response to expected fiscal tightening by the U.S. Federal Reserve Bank, and possible future tightening by the Bank of Japan and European Central Bank.
Hedge fund management companies are entering 2018 from a position of strength, thanks to strong securities selection.
"I'm excited about opportunities for hedge funds in 2018," said Kevin G. Russell, UBS O'Connor's New York-based managing director and chief investment officer.
He noted that "equity index returns were staggeringly good in 2017" and as equity valuations improved, a benign and supportive economic environment encouraged companies to take on more leverage and grow their businesses, but stressed he believes conditions will change in 2018.
Mr. Russell said equities are unlikely to repeat "the same magnitude of returns and valuation expansion as the markets transition from monetary policy support to fiscal stimulus."
He stressed fiscal policy changes, regulatory rollbacks and tax reform in the U.S. "should be a self-sustaining tail wind for active managers."
UBS O'Connor manages $5.4 billion in multistrategy hedge funds.