More specifically, the combination of rising yields, tightened liquidity and heightened risk across global markets in 2019 will benefit managers running hedge funds with equal ability to go long and short, said Robert Prince, co-chief investment officer of Bridgewater Associates LP, Westport, Conn.
"We've been in a great market for the past nine years that benefited long-oriented managers because many assets did very well in an environment of falling yields, quantitative easing and good growth," Mr. Prince said, noting the reversal of those conditions makes it much harder for long-biased managers but is "an opportunity to demonstrate skill for strategies that do not have a long bias."
Bridgewater manages a total of $160 billion, $130 billion of which is in hedge funds.
Specialist credit manager Michael W. Vranos, founder and CEO of Ellington Management Group LLC, Old Greenwich, Conn., warned that 2019 will be characterized by a lack of market direction in equities and bonds, forcing hedge fund managers to focus on fundamentals.
"Choosing the securities with the best relative value and insulating them from major market risks is important as we move from quantitative easing to quantitative tightening," he stressed, noting that providing liquidity and active trading will "continue to be winning credit strategies in 2019."
Ellington manages $7.5 billion in hedge funds, with a focus on structured credit strategies.
Executives at Cheyne Capital Management (UK) LLP, London, which manages $6.5 billion, are looking forward to exploiting increased dispersion in global credit markets, said Stuart Fiertz, co-founding president and director of research.
"The market will become more thoughtful and discerning and that will create room for skilled credit managers to find opportunities," Mr. Fiertz said.
European banks are being forced by regulation to acknowledge losses on loans, and Mr. Fiertz said as these banks come under pressure to shrink their balance sheets, many likely will begin to shed their distressed but functional corporate loans, providing a good buying opportunity.
Cheyne recently staffed up with the addition of 10 credit specialists to take advantage of the situation, Mr. Fiertz said.
Long/short equity manager Lee S. Ainslie III, managing partner of Maverick Capital Ltd., New York, believes odds are growing that a "toxic soup" will develop in 2019 year as rates rise, the economy slows and corporate operating margins shrink.
"It may be very difficult to make money" in 2019, he said.
Volatile market environments, however, are helpful for long/short equity managers and greater dispersion between stocks and fewer artificial constraints in the form of quantitative easing means "alpha generation should become easier," Mr. Ainslie said.
Net exposure to the market in Maverick's core long/short equity hedge funds is at the low end of the range, Mr. Ainslie said, hopefully making them "well-positioned for 2019."
Maverick manages $10 billion in hedge funds.
Volatility manager Capstone Investment Advisors LLC, New York, has attracted significant attention from institutional investors to its equity volatility strategies since a spike in volatility last February rocked markets, said Paul Britton, founder and CEO.