Hedgeweek Global Outlook 2022

HEDGEWEEK

Global Outlook 2022

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SIMILAR WEB

ENHANCING INVESTMENT DECISIONS THROUGH WEBSITE TRAFFIC DATA

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aving a digital presence has become intrinsically important for the majority of companies and a variety of insights can be gleaned from the web traffic data their websites generate; insights which can help inform hedge fund managers’ investment decisions and support their efforts to enhance communication and transparency with their investors.

“Businesses have become dependent on their digital performance to support growth. Best Buy is one of the best examples of this,” Ed Lavery, Director of Investor Intelligence, Similarweb points out, “The company’s share price growth is dependent on the successful acceleration and scalability of its ecommerce initiatives.”

The necessity of having an online platform was propelled into sharper relief in the wake of the Covid-19 pandemic in 2020 as virtual interactions became part of everyday life. “The pandemic accelerated the digital transformation plans of many companies, and web traffic is a very insightful means of comprehensively tracking many of these firms, their brands and products,” Lavery highlights.

Similarweb provides near real-time web traffic and engagement data. The firm’s online traffic data delivers an unbiased, objective view of real-world web and app performance. This information allows hedge fund managers to get a read on companies intra-quarter, ahead of scheduled reporting.

“Hedge funds can use web traffic and other metrics as a proxy for earnings and compare a company’s earnings in a chosen period, even halfway through a quarter. This means they can get a strong view on that company and how it’s performing, ahead of the official earnings release,” explains Lavery.

Using this alternative data set enables managers to make better informed investment decisions. According to Lavery: “It’s about being prepared and aware of your holdings’ performance. Managers can closely monitor their investments and build an intra-quarter view on a company or segment that’s currently trending. Also, knowing whether

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a company is not going to hit its target one quarter can help ease some of the issues taking place in that market well in advance of quarterly results.”

Another unique aspect of website traffic data is that it is global. This data is available for virtually any country or regional breakdown.

It can also be used to monitor the number of transactions happening in a particular market or related to a specific brand. “Website traffic is actually a much cheaper substitute, allowing managers to gather transaction information. While credit card data is not really international, website traffic data is,” says Lavery.

KNOWING WHERE TO START Managers looking to make use of alternative data could risk being overwhelmed. However, in Lavery’s experience, the most significant challenge hedge fund clients tend to struggle with is related to where to start analyzing a company’s digital presence. “Every digital business operates differently and their websites have different structures and functions – some are transactional, others enable access to tools or services. So, understanding how the website serves that particular

company is critical to gaining the correct insight from web traffic data,” explained Lavery.

The service offered by Similarweb, which gives managers access to web traffic data, is intuitive and straightforward to use. “You don’t need to be a data scientist to benefit from the web traffic data we provide.

We provide a lot of insight support and share many examples of how the data can be used. We update clients on trends we identify in the market ourselves and show them how they can extract similar insights.

“The most valuable aspect of these digital signals is that any one can find insights on our platform in a way which is simple to use and very visual. One challenge finance and hedge fund professionals sometimes face is looking at a business outside the parameters of financial fundamentals. So, a tool like this can help them extract insight from a different source of information, understand how to prioritise what’s valuable, and what is noise.”

Ahead of earnings season, here are the top 10 metrics hedge fund managers can track using Similarweb data: Transactions, Cancellations, Product performance, Market share and CPG performance. To learn more about Similarweb visit www.similarweb.com/corp/investors/

ED LAVERY

DIRECTOR OF THE INVESTORS SOLUTION Ed heads SimilarWeb’s Global Investor Solutions business. Ed joined SimilarWeb four years ago and has been spearheading the solution to help investors integrate Digital Alternative Data into their investment research. He has also worked with many of the world’s leading brands, shaping their digital strategies through market intelligence data. Prior to SimilarWeb, Ed started his career in Investment Banking in London, working at Rothschild and DC Advisory.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

RFA

TECHNOLOGY TO TRANSFORM THE WAY FUNDS INTERACT WITH CLIENTS

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ttention to risk and ways of mitigating it remains critical for hedge funds and their use of technology. However, one of the most compelling areas of growth is rooted in the way a fund interacts with its clients and the impact technology can have on that relationship.

George Ralph, Global Managing Director & CRO, RFA observes how a lot of the technology fund managers are using is about how to provide the level of comfort their investors and regulators are comfortable with.

“It’s the day to day we need to worry about right now. Macro tech is the future of how we define conversations around emerging technologies. Core practices around public cloud, risk and digital experience will stand a firm in good stead and deliver a great grounding to expand and scale in the future,” he says, “Although macro tech takes us way beyond encompassing blockchain technology and also cognitive experience, for most right now, digital reality is a consideration for the future, but it should still be on a funds radar.”

He highlights that the way a fund interacts with their client and what the result of that is in terms of relationships is a really exciting part of what the future looks like in the alternative investment sector.

RETAINING THE FOCUS ON RISK

However, as the world moves towards these developments, the focus on risk remains key. Ralph outlines: “We have seen a relentless barrage of press around cyber risk and as funds have gone through the process of digitisation managing risk has been key. At RFA we

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have been talking for some time about mitigating risk of attack.”

There are many processes hedge funds can put in place to help reduce the likelihood of any breach of their own systems. The way they approach their overall IT infrastructure from public cloud upwards is vital. Ralph advises: “Process and procedure are key. Then you need to start thinking about what your firm needs to mitigate risk. Different access levels for different users in a must. Using collaboration tools correctly and securely will really reduce your risk of attack.

“Finally, work with an outsourced provider which has specialist teams with the experience to handle managing your cyber security defences, from managed detection and response and a security operations centre which can support your firm and deliver reporting on your systems that help you mitigate against cyber-attack. Fund

manager firms are, mostly, at the start of their macro tech experience and getting the basics in place like attitude to risk and a robust cloud set up is a good starting point and the place where further tech developments will flow from.”

Although most hedge funds know there are huge advances being made in technology which could augment their practice, their job is not to fully understand and implement that technology. “That would take them away from their core business which is investment strategy and client relationships,” Ralph points out, “At RFA, we deliver tech solutions to clients and can share what works as we have tried and tested it all in house, globally. We have been doing this for over 30 years globally and are early adopters of new tech ourselves Innovation is part of our DNA.”

GEORGE RALPH

GLOBAL MANAGING DIRECTOR & CRO As Global Managing Director of RFA, George is a technology and business leader with a proven track record of strategic alignment, process improvement and guidance. Having been both a COO and a CTO of his own technology firms over a nineteen-year period, he looks to provide transparent guidance to every business he serves and the people he leads. George has extensive delivery and technical experience in network and server architecture, large-scale migrations utilising leading technology brands, and IaaS offerings.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

INTRODUCTION

VAST OPPORTUNITY

BUT RISK PERSISTS

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ith the Covid-19 pandemic looming large over global economies for a second year, and markets and asset classes enduring sporadic bouts of volatility, hedge funds once again made a strong case for their inclusion in investors’ broader portfolios during 2021.

The industry generated double-digit gains averaging more than 10 per cent last year, falling just short of 2020’s near-12 per cent rise, but nevertheless recording its third-best performance since 2009, when an assortment of hedge fund strategies scored stellar returns amid the turmoil of the Global Financial Crisis.

Perhaps more importantly, though, 2021’s steady showing appears to have consolidated hedge funds’ recent renaissance in the eyes of investors following a patchy decade which saw many allocators retreat from the sector: industry assets swelled towards record volumes of some USD4 trillion during the past 12 months.

2022 looks set to be another year ripe with opportunity and

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fraught with risk. As governments and central banks aim to steer economies through a nascent recovery from the upheaval of the pandemic, the geopolitical backdrop and investment environment looks more fractured than ever. Renewed challenges surrounding inflation, interest rates, and stock market gyrations sit next to the booming expansion of cryptocurrencies and digital assets, the postCovid rebound in M&A activity, soaring commodity prices, and the growing urgency of the climate emergency.

With yield-hungry investors continuing to reevaluate their traditional 60/40 allocations, it’s all shaping up to be another busy – not to mention unpredictable - year for hedge funds, regardless of investment strategy.

Hedgeweek’s annual Global Outlook once again takes an in-depth look at the range of issues impacting equities, credit, macro and more, with both established, brand-name hedge fund managers and smaller start-up names across regions offering candid and

often-contrarian perspectives on the key investment themes and risks dominating their respective markets over next 12 months.

The report also takes the temperature of the hedge fund investor community, and considers how ESG, technology and other emerging new trends are continuing to influence and disrupt this most pioneering and forward-thinking of industries. We hope you enjoy it.

All of us at Hedgeweek would like to extend our gratitude to all those who took time out of their busy schedules to offer their valuable insights in this year’s report.

I wish everyone a safe and successful 2022.

Hugh Leask Editor, Hedgeweek

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CONTENTS

CONTENTS CHAPTER ONE: MACRO

CHAPTER THREE: CREDIT

08 Toscafund Asset Management

22 Corbin Capital

35 Prime Capital AG

09 Man FRM

23 Promeritum Investment Management

10 BlueBay Asset Management

24 Altana Wealth

11 DG Partners

25 Alpha Blue Ocean

38 Trium Capital LLP

13 Wavelength Capital Management

CHAPTER FOUR: ESG

40 Innovest Portfolio Solutions

27 JP Morgan Asset Management

41 Sussex Partners

CHAPTER TWO: EQUITIES

28 Callan

15 Argonaut Capital

29 Cardano

CHAPTER SIX: NEW TRENDS

16 Little Harbor Advisors

30 BNP Paribas Asset Management

44 Maso Capital

12 Norbury Partners

17 Antiloop Hedge 18 Adirondack Capital 19 Balchug Capital 20 Good Soil Investment Managment

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CHAPTER FIVE: ALLOCATOR SENTIMENT

31 K2 Advisors 32 HITE Hedge Asset Management

36 Syz Capital 37 Optima Asset Management 39 TIFF Investment Management

43 New Holland Capital 45 Quantology Capital Management 46 BKCoin Capital

33 Wedbush Securities

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CHAPTER ONE

MACRO

MACRO CHAPTER

“WE COULD SEE THAT FOR ALL THE BENEFITS OF STIMULUS PROGRAMMES AND THE REBOUND FROM UNLOCKING US, THE WORLD ECONOMY SIMPLY RUNS OUT OF STEAM.”

SAVVAS SAVOURI

CHIEF ECONOMIST, PARTNER, TOSCAFUND ASSET MANAGEMENT

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have no doubt that 2022 will be looked back on as a year of momentous reorientation. I write here of China’s economy being recognised as the world’s only economic growth engine but its currency becoming accepted as a real reserve currency. This can only of course come about because the US economy and the dollar have been demoted. And whilst the 2021 year-end rally in the greenback might suggest momentum into 2022, I would caution otherwise. This said, I see the likes of Egypt and Brazil et al devaluing against the dollar.

So much for my central scenario. There are risk worm holes we could explore. Take exogenous shocks that occur abruptly. We

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could for instance suffer a virulent Covid-22, with lockdowns all over again, this time with nothing like the fiscal or monetary response for Covid-19.

There is also – as always – the potential for some adverse geopolitical shock. From nearby, say Russia, or far afield, say North Korea with the South, China with Taiwan. Within the EU’s borders there is the threat that Hungary or Poland try to unwind the EU Project, or the UK and EU go at it in a trade war to their joint cost.

There are also endogenous risk worm holes. We could for instance see that for all the benefits of stimulus programmes and the rebound from unlocking us, the world economy simply runs out of steam –

China too. Matters here could be made worse by economies facing rising interest rates being unable to cope with such shocks, resulting in stagflation. All this said, I have full confidence that China will end 2022 strongly and so too will all those economies and currencies that link closely to it, the UK included.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

MACRO CHAPTER “OUR PORTFOLIOS WILL OVERWEIGHT STRATEGIES THAT TIGHTLY HEDGE MACRO AND MICRO FACTOR RISKS. WE ARE ALSO LOOKING FOR HEDGE FUND STRATEGIES THAT CARRY SUFFICIENT TAIL PROTECTION.”

JENS FOEHRENBACH CHIEF INVESTMENT OFFICER, MAN FRM

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he macro-economic events that I expect will influence the investment landscape are still dominated by the global pandemic and its fallout. The Omicron variant has reminded us that governments react to Covid with drastic measures. As these measures counter the reflationary trend that many investors have been positioned for, markets could react violently.

Inflation persistence and central banks’ responses will likely also remain an important topic for markets, with the potential to create ongoing waves of volatility across asset classes and equity factors.

A significant tail risk for the investment landscape is a central bank policy error – which has arguably never been higher than today.

This would have serious implications for markets given the implicit assumption that central banks provide a put to the markets. A possible rollover of US growth and further slowdown of the Chinese economy could pressure global equity levels.

All of this points to challenges to traditional 60/40 portfolios.

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Therefore, carefully structured and risk-managed hedge fund portfolios that provide convexity could be very value-additive in 2022.

A geopolitical development that could impact markets and therefore the investment landscape for hedge funds is the ongoing tensions between the US and China. While it seems unlikely at this point that a trade dispute would have the same intensity as the conflict in 2018, lack of coordination and cooperation between the two largest economic blocks is a negative factor for markets. The Middle East always has the potential for a geopolitical crisis which could enhance the pressure on tight energy markets and therefore economic growth and inflation in developed markets.

In my opinion, the alpha generation outlook is fairly positive.

The macro factors outlined above are likely to create volatility and challenging markets for risk assets. Hedge funds therefore have the opportunity to add real value to investors. We are looking for good

risk management, which has the potential to be a key alpha source in 2022. Our portfolios will overweight strategies that tightly hedge macro and micro factor risks. We are also looking for hedge fund strategies that carry sufficient tail protection.

With the challenges from the escalation of climate change and continued investor demand for responsible investment solutions, we believe that ESG will become an increasingly important topic for hedge funds. We are looking at responsible investing both as an alpha generation source and as an opportunity for hedge funds to add value beyond returns.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

MACRO CHAPTER “CURRENCY MARKETS MAY SEE LARGER MOVES THAN WITNESSED OF LATE, AS DIVERGENT MONETARY AND FISCAL POLICIES AND APPROACHES TO THE PANDEMIC LEAD TO MORE HETROGENUOUS AND DIVERGENT OUTCOMES.”

MARK DOWDING

CHIEF INVESTMENT OFFICER, BLUEBAY ASSET MANAGEMENT

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022 will witness a tightening of liquidity conditions as central banks, led by the US Federal Reserve, start to withdraw monetary accommodation launched since the start of the pandemic. This may represent something of a headwind for financial markets in the year ahead, making 2022 a time when beta returns are much more subdued than has been the case in the past several years. An assumed recovery from Covid should underpin robust economic growth and support corporate earnings. Perhaps the global inflation outlook will be one of the most influential and uncertain topics which will tax investors’ thinking. If an easing of supply bottlenecks sees price pressures cool, then this may contain the upward pressure on rates. However, if tight labour markets and shifting inflation expectations see inflation become more entrenched, there is a risk that markets will have been too complacent about a transition to a new macro regime.

From a political standpoint, the US Republican Party will surely

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score big gains at the midterms later next year, heralding a lame duck period for the remainder of Biden’s tenure. The French elections next spring could be the source of some market volatility but it remains unlikely that a more extreme candidate will prevail. Yet with Italian elections likely early in 2023 and with scope for a deepening rift between inflation hawks in the North, and growth and spending bulls in the South, Europe could look more divided at the end of 2022 than has been the case during 2021. Further east, China is set to remain in self-imposed Covid isolation. The Chinese property sector and construction more generally will remain pressured, yet the outlook for manufacturing and consumption should help limit downside risks to growth. Geopolitically, Russia/Ukraine represents an ongoing risk, but one the West can do little about. US/China relations seem unlikely to improve much and elsewhere the fallout from Covid may lead to idiosyncratic risks in some emerging markets resulting in divergent performance.

Declining policy support may also herald a period of higher volatility in the year ahead. Dispersion of returns between issuers and sectors may be a growing theme as markets focus on winners and losers after policy support starts to fade. Currency markets may also see larger moves than witnessed of late, as divergent monetary and fiscal policies, and approaches to the pandemic lead to more hetrogenuous and divergent outcomes. The past two years may not have been plain sailing for investors, though in equity markets most following a long only approach will have made good money. In 2022, we may witness a greater emphasis on hedge funds and absolute return strategies, as market beta starts to disappoint and as we pass the point of peak opportunity in private asset classes, such as private equity and private debt.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

MACRO CHAPTER “IF THE MARKETS’ HOPES THAT INFLATION IS TAMED AS WE MOVE TOWARDS THE END OF THE YEAR ARE NOT FULFILLED, THEN EQUITY VALUATIONS MAY BE CHALLENGED AND AUTHORITIES MAY HAVE DIFFICULTIES CONTAINING INCREASED VOLATILITY AND A BIG BEAR MOVE WITH THE LIMITED MONETARY POLICY OPTIONS OPEN TO THEM AT THAT TIME.”

DAVID GORTON

CHIEF INVESTMENT OFFICER, DG PARTNERS

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onetary tightening is inevitable through the first half of 2022.

However, with global debt levels now over 250 per cent of GDP, it is highly unlikely that real policy rates can reach zero, let alone return to a ‘normal’ positive. This will leave Central Banks and markets hoping that higher prices destroy sufficient demand to bring inflation down further in the medium term. Continued negative rates and high nominal GDP growth will support asset prices in the near term and new highs in equities are likely to continue being made through Q2.

Commodities, having performed exceptionally well last year, are expected to continue their bull markets and will likely be buoyed by a number of factors. Above trend nominal growth, lax monetary

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policy, high infrastructure spend and ESG policies are tailwinds for markets already suffering from medium term under-investment. The interlinkages across commodity markets and often intense energy usage in their production, risks an upward spiral in prices. High input costs have already seen rapid increases in fertilizer costs, threatening food supplies next year. Governments may well be inclined to monetise these higher prices rather than allowing market forces to work through.

Risks to this outlook include another more deadly wave of Covid hitting and cratering demand. Whilst this is a major tail risk, we believe it more likely that outbreaks will become less severe over time as vaccine programs, new drugs and society as a whole adapts. Risks from a deleveraging Chinese economy remain and may be a headwind

for global growth, but the authorities are already easing policy where necessary to prevent a disorderly slowdown. And as both sides quietly attempt to assert their global agendas, a significant escalation of US-Sino relations seems unlikely under a more diplomatic US administration.

If the markets’ hopes that inflation is tamed as we move towards the end of the year are not fulfilled, then equity valuations may be challenged and authorities may have difficulties containing increased volatility and a big bear move with the limited monetary policy options open to them at that time.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

MACRO CHAPTER “WE ARE VERY BULLISH ON THE WHOLE COMMODITIES COMPLEX AS IMBALANCES IN SUPPLY AND DEMAND, ALONG WITH TIGHT INVENTORY LEVELS, BRING SUPPORT AND UPSIDE RISK TO PRICES.”

DECIO NASCIMENTO

FOUNDER & CHIEF INVESTMENT OFFICER, NORBURY PARTNERS

T

he unprecedented global coordinated response to the pandemic in mid-2020 will be much more acutely felt in 2022 when the Covid mobility crisis eases, and there is enough time for the transmission mechanisms in the economy to work.

We expect that rates will be higher around the world, especially in developed markets. However, we don’t expect the real rates differential to be large enough versus emerging markets to keep the USD supported, and we see broad weakness in the currency for next year.

We are very bullish on the whole commodities complex as imbalances in supply and demand, along with tight inventory levels,

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bring support and upside risk to prices.

Lastly, equities and credit are very expensive overall. We find compelling investments only when taking idiosyncratic risk in these markets.

Altogether, we expect to see good global growth and inflation running above pre-pandemic levels next year, while commodity supply and demand fundamentals become increasingly more important as the world strives for net-zero in the face of a decade of underinvestment.

From a geopolitical perspective, two themes we are watching closely are: (1) the standoff between Russia and Ukraine, which could possibly lead to sanctions and the banning of Nord Stream 2, a key

natural gas pipeline to Western Europe where gas prices have led to increased coal demand and higher prices for emission credits, and (2) how China wrestles with strained diplomatic ties with the West, a failing real estate sector, and over-indebted African nations in which it owns or operates a myriad of rare earth mines, ports, and other infrastructure that will be essential for the entire world to meet its netzero goals.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

MACRO CHAPTER

“WE BELIEVE THE DISPERSION IN ECONOMIC CIRCUMSTANCES FROM ONE BLOC TO THE NEXT WILL BE A KEY DRIVER IN HOW MARKETS EVOLVE IN 2022 AND PROVIDE A DEEP OPPORTUNITY SET FOR INVESTORS WHO UNDERSTAND THE DYNAMICS AT PLAY.”

ANDREW DASSORI

CHIEF INVESTMENT OFFICER, WAVELENGTH CAPITAL MANAGEMENT

N

o economy was able to escape the impact of Covid-19, and over the past two years the virus has upended people’s lives across the globe. Policies implemented during the period, however, have left countries in markedly different fiscal and monetary positions as they seek to manage a wide range of trajectories for growth and inflation coming out of the pandemic.

We believe the dispersion in economic circumstances from one bloc to the next will be a key driver in how markets evolve in 2022 and provide a deep opportunity set for investors who understand the dynamics at play. The picture is clearest when assessing a developing world with more traditional monetary policy tools available versus a developed world where rates are near zero and the coordination

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of fiscal and monetary policy has grown increasingly critical. In this environment, we see a heightened potential for policy errors and expect markets to recalibrate to account for new risks on the horizon.

On the geopolitical front, it is likely that existing tensions are already priced into markets, but as the world bifurcates into spheres of influence around the US and China, mounting long-term pressures beneath the surface of this relationship may not yet be fully appreciated. Policy developments around trade, technology, and foreign investment have already begun reshaping how these economic ecosystems interact, and if their disentanglement were to accelerate, we would expect significant knock-on effects for the global economy. Beyond potential direct impacts on supply chains and capital flows, a lack

of coordination between the US and China could make addressing global issues like climate change increasingly difficult. We expect the changing nature of this relationship to be a driving force in markets over the coming year and beyond.

With the global economy in a state of transition, we believe that adapting to a new policy landscape and managing the risks that result will be increasingly important for investors. In this context, we seek to maintain a balance to potential economic outcomes while actively monetizing the increased opportunity set produced by these disruptive forces across markets.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CHAPTER TWO

EQUITIES

EQUITIES CHAPTER

“THE IMPACT OF MORE PERSISTENT INFLATION ON FINANCIAL MARKETS IS LIKELY TO BE A FED HIKING CYCLE THAT MARKS THE END OF AN ERA OF FREE COST OF CAPITAL.”

BARRY NORRIS

CEO AND CIO, MANAGER, VT ARGONAUT ABSOLUTE RETURN FUND, ARGONAUT CAPITAL

O

micron is likely to mark the end of the pandemic, with an overall mortality rate lower than influenza, even for the unvaccinated, which means mass vaccination programmes will likely also be quietly phased out. Countries such as China that continue to follow “Zero Covid” policies will exacerbate ongoing global supply chain woes. Inflation in 2022 will be higher overall than 2021 – averaging above 5 per cent rather than the 2.5 per cent predicted by the Fed. Demand for oil should see a strong recovery in 2022, which oil producers will struggle to meet. The cost of energy decarbonisation will also become clear. Switching off fossil fuels for unreliable renewables has already resulted in structurally higher power prices which has

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not only hit the consumer, but is rendering much of Europe’s heavy industry uncompetitive. Higher food and energy prices will also result in extreme social and political unrest in emerging markets. The effects of this structural energy shock – as with OPEC in the 1970s – will have profound negative consequences.

The impact of more persistent inflation on financial markets is likely to be a Fed hiking cycle that marks the end of an era of free cost of capital. We see an abundance of short opportunities in “story stocks”, often with no sustainable competitive advantages, no valuation support, instead only some vague hope that they represent the “future”, which is subject to a high degree of risk and with the prospect

of a rising discount rate, this possibility will now be weighed by a far less patient market.

After more than a decade long boom in long duration equities and bonds, our strategy offers investors a unique and valuable hedge on the risk of a 1970s redux.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

EQUITIES CHAPTER

“TACTICAL EXPOSURE STRATEGIES DRIVEN BY INFORMATION GLEANED FROM VIX PRICING ARE ONE OPTION TO ENJOY THE PARTY WITHOUT WORRYING ABOUT OVERSTAYING ONE’S WELCOME.”

JEFF LANDLE

CHIEF INVESTMENT OFFICER, LITTLE HARBOR ADVISORS

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ne way to describe equity investments since the brief market meltdown in 2020, and as we look forward to 2022, is as follows: imagine you are at a wonderful party, having a great time and contemplating when you should leave. Too early, and you’ve missed a great deal of fun. Too late, and you run the risk of over imbibing, no Ubers or worse.

Over the last couple of years, equity investments have been akin to that amazing party. There are signs that it is getting later in the evening, but no one really knows for sure when the right moment is to bid adieu and head back home.

So, how does one determine when it is time to leave the party?

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Probably when it appears everyone else is about to do the same thing, but before the big rush for the exits. For equity markets, VIX instruments are a good proxy for people getting ready to leave. One could think of these indicators as the ‘Ubers’ for investors. Uber rides are priced relative to proximate demand – as more people are looking for rides, the price rises. The same could be said for VIX instruments.

Institutional hedgers are like the Uber riders: the more they seek insurance (read VIX options and futures), the higher the price of the protection.

By understanding how that demand operates, it may be possible to divine how investors may react and have insight into when it’s

time to arrange for a ride home before the departure rush becomes overwhelming. Given that the uncertainty around the economic and global environments is increasing, tactical exposure strategies driven by information gleaned from VIX pricing are one option to enjoy the party without worrying about overstaying one’s welcome.

Remember, the secret to terminal wealth-maximisation is not necessarily making more on the way up, but losing less on the way down and letting compounding work its magic.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

EQUITIES CHAPTER

“ANTILOOP’S EQUITY TEAM CURRENTLY HAS A POSITIVE VIEW ON DEFENSIVES – TOBACCO, RETAIL BANKS, LOW-COST RETAIL – VERSUS TECHNOLOGY AND CYCLICALS; AS WELL AS PREFERRING CHINESE GROWTH STOCKS, LIKE ALIBABA, TO US COUNTERPARTIES, LIKE AMAZON.”

KARL-MIKAEL SYDING PORTFOLIO MANAGER, ANTILOOP HEDGE

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he decades-long growth/ value divide looks like it could narrow during 2022, or could passive index flows really continue to make the gap even more absurd? Both a continuation and a reversal alike have the potential to wreak havoc with equity hedge fund returns. Antiloop’s equity team currently has a positive view on defensives – tobacco, retail banks, low-cost retail – versus technology and cyclicals; as well as preferring Chinese growth stocks, like Alibaba, to US counterparties, like Amazon.

The Fed’s Powell already seems to be backpedalling from his hawkish stance – although admittedly questioned to begin with. Were he to decisively reverse course and halt QE tapering or postpone

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rate hikes, the hoped-for growth/ value correction would probably be put down before it even got going. Such a move could wrong-foot Antiloop’s growth-sceptical equity strategy, and probably many other equity hedge funds as well.

Central banks will eventually get price inflation gauges under control, through careful tightening. Rate hikes combined with lingering supply shock induced inflation could fuel investor rotation into, e.g., retail banks, from high-multiple growth stocks with questionable paths to profitability such as Robinhood, Peloton, Uber, DoorDash and AMC. The price for such tightening would be lower growth, further exacerbated by Omicron shutdowns – even if the latter (informed by

the Swedish laissez-faire example) turn out to be more limited than the initial pandemic related shutdowns.

Only 0.5 per cent of US vehicles are fully electrical. Many manufacturers are only now bringing BEVs to market, thus setting the stage for explosive growth. One consequence is increased demand for materials, like graphite, nickel, cobalt and lithium, as well as copper for electrical wiring. The focus on sustainability should further increase interest in uranium, and REEs used in motors and turbines. Renault, GM and Honda should benefit too.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

EQUITIES CHAPTER

“THE 2021 TECH CRACKDOWN IN CHINA WILL CONTINUE TO PROVIDE SMART VALUE INVESTORS AND TRADERS WITH ALPHA GENERATING TARGETS.”

EDMUND LUZINE CEO, ADIRONDACK CAPITAL

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e see tremendous opportunities across the global emerging markets equity sector in 2022, along with substantial headwinds from large risks on the horizon.

Those risks include an increase in interest rates in the US, high inflation in major global economies, continued tension with China, and Russian aggression directed at Ukraine that will impact energy and related commodities markets.

There are excellent opportunities for value investors in select sectors and nations in the developing world. The 2021 tech crackdown in China will continue to provide smart value investors and traders with alpha generating targets, and economic activity will increase in China after the Year of the Tiger Lunar New Year and post-Olympic travel, as the nation opens up to the rest of the world.

The return to the office (RTO) trade combined with a continued reopening of the global economy will spur demand, driven by consumers

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and global travel. Record air travel at Miami International Airport in November is a leading indicator of future trends in 2022.

On a macro level, we have very few concerns over Covid-19 and the pandemic. The increase in deaths in the US was slightly higher than a normal flu season, and economic activity in red states will continue to be robust.

There are also select opportunities in the infrastructure sector which supports electric vehicles – charging stations, electrical transmission components, batteries, other storage devices, and select elements, such as lithium, cobalt, and others.

We also see value in the re-shoring of trade. As the world recovers and opens up from the pandemic, we expect supply chains to continue to shift out of China – to low-cost areas in Asia, Africa, and especially Mexico, next to America’s economic engine.

Our top picks for 2022 and beyond are: the newly formed Canadian

Pacific Kansas City Southern Railroad; Naspers of South Africa and its holdings of China’s Tencent; Teck; Teva Pharmaceuticals; Apache and its significant prospects in Suriname; Maxar Technologies; Alibaba; and Yum China.

Finally, we have seen demand from investors for more bespoke products – separately managed accounts with strict ESG requirements.

We also see institutional investors seeking an increase in the diversity of fund managers from select minority and veteran-owned asset management firms.

We see next year as very rewarding for patient, but aggressive and intelligent investors. 2022 is the Year of the Tiger in Asia. We are already on the prowl!

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

EQUITIES CHAPTER

“IN 2022, WE WILL BE EVEN MORE SELECTIVE AND FOCUS ON QUALITY NAMES, EVENTS AND COMMODITIES.”

DAVID AMARYAN FOUNDER AND CEO, BALCHUG CAPITAL

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he prominent risks we have identified, include inflation, Covid-19, geopolitics, supply chain problems, labour shortages, slowing global growth, slowing corporate earnings and diminishing equity returns.

We believe that inflation can create a major headwind for markets globally in 2022. At the beginning of the year, the inflation forecast was 2 per cent. Now, it’s around 7 per cent, and it can be higher. It is broad-based and is probably not as “transitory” as some people think. Keeping inflation under control is one of the Fed’s main priorities. In 2022, it will be more aggressive in ending its assetbuying programme and raising rates, which will slow down global growth, with all the implications that come with it.

Covid-19 will continue to be on everyone’s radar. Today, we are worried about the Omicron variant, tomorrow other more deadly

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variants might emerge, and this uncertainty will continue to create volatility in the markets. We are a bit more optimistic than most other people. Unless something extraordinary happens and we get hit with an extremely contagious and deadly variant, we should be able to deal with new outbreaks faster and more effectively than before.

This is not March 2020. We are more prepared than ever before. We already have a vaccine and know how to change it quickly to protect against new variants. Hence, we see fewer chances of lockdowns.

Nonetheless, Covid-19 can cause wild moves in the markets and increase volatility in general.

In terms of geopolitics, Russia, Ukraine, China and the West’s response will be the focus in 2022. We are generally optimistic and believe that geopolitical tensions will ease in 2022. We do not expect the Russia/ Ukraine conflict to escalate to actual war – that

is nonsense.

Volatility creates opportunities. Hence, all the above-mentioned risks can create opportunities in 2022. The ability to differentiate real systemic risks from market overreactions will be key. We generally expect muted returns in the broad market. Rising interest rates will put pressure on growth stocks, especially the ones with no earnings, but extremely high valuations (and there are plenty of those).

In 2022, we will be even more selective and focus on quality names, events and commodities. For this year, we like: value, some growth sectors (such as EVs), Biotech (where we expect to see continuing consolidation), China, Russia (as tensions ease, we predict lots of opportunities and events), commodities and crypto.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

EQUITIES CHAPTER

“MACRO UNCERTAINTY AROUND COVID-19, INTEREST RATES AND INFLATION WILL CONTINUE TO DRIVE SKITTISHNESS IN EQUITY MARKETS.”

EMMET PEPPERS

FOUNDER AND PORTFOLIO MANAGER, AND MATT SMITH, PORTFOLIO MANAGER, GOOD SOIL INVESTMENT MANAGMENT

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he past two years saw an extreme uptick in valuations for growth companies, yet we believe investors have had a difficult time identifying which companies will be truly transformative in the long term. Many companies with very little differentiating technology or strategies saw stratospheric valuation multiples, while clear leaders, such as Tesla, are still viewed through a skeptical lens by many of our hedge fund peers.

This landscape sets up an extreme disparity in outcomes among companies which may appear on paper to be peers; many will fail,

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and a few will be huge winners. In 2022, we believe the market will continue to better differentiate between these two types of companies. The SPAC craze will almost certainly cool, and many companies that listed this way are likely to see their valuations cut.

Macro uncertainty around Covid-19, interest rates and inflation will continue to drive skittishness in equity markets. We believe that, even if these issues cause markets in general to weaken, significant return potential still exists for investors who understand the huge technological disruptions which are poised to unfold this

decade.

At Good Soil, we believe this dynamic will create huge asymmetric opportunities, both on the long and short side. Alpha generation will be achieved by those investors who have the information advantage in identifying winners and losers in this dynamic.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CHAPTER THREE

CREDIT

CREDIT CHAPTER

“WE ARE KEENLY FOCUSED ON LESS-TRAFFICKED AREAS OF CREDIT MARKETS, BUILDING PORTFOLIOS OF OFF-THE-RUN ASSETS WITH THE POTENTIAL TO GENERATE CONSISTENT RETURNS.”

CRAIG BERGSTROM CHIEF INVESTMENT OFFICER, CORBIN CAPITAL

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e enter 2022 with credit spreads at near all-time tights, inflation at multi-decade highs, central bank policies rapidly changing from extreme easing to potential tightening measures, and COVID variants still rapidly spreading.

Considering this backdrop coupled with a less accommodative policy on the horizon, how is an investor supposed to make their target returns should we experience even minor hiccups?

Corbin continues to believe that the key to generating returns in this environment is the combination of active management and sourcing off-the-run investment opportunities. We think allocations to traditional credit are more likely to generate lackluster returns, creating meaningful opportunity costs for pension investors. In these

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uncertain times, we are therefore keenly focused on less-trafficked areas of credit markets, building portfolios of off-the-run assets with the potential to generate consistent returns. In traded markets, this means focusing more on special situations, such as event-driven opportunities and pockets of structured credit that still trade wide to high yield or other comparable risks.

We also see many investors moving substantial allocations from liquid credit to illiquid private credit, which offers higher return potential with less mark-to-market volatility, though the sponsor backed lending market seems very competitive to us. That said, we think there are meaningful return premiums for non-sponsor corporate borrowers, but currently think the best risk adjusted return

opportunities can be sourced in areas of specialty finance, such as land-banking and non-QM mortgage origination. We believe that investors who make the leap from liquid to private credit and from sponsor-backed lending to more niche private credit strategies will benefit from positioning their portfolios for enhanced returns that will compound for years to come.

While 2021 was a year of economic recovery, which buoyed risk assets, we expect 2022 to require a nimbler approach.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CREDIT CHAPTER

“WE BELIEVE THAT EVENTS AND VOLATILITY WITHIN THE ASSET CLASS PROVIDE FOR A GOOD ALPHA-GENERATION POTENTIAL.”

PAVEL MAMAI

CO-FOUNDER AND MANAGING PARTNER, PROMERITUM INVESTMENT MANAGEMENT

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n terms of market outlook for 2022, we can only comment on emerging market credit markets. We believe EM investment grade will trade in line with core rates, while the spreads in EM high yield widened significantly in 2021 to provide better protection against a core rates sell-off. New issuance in high yield will be more limited versus last year, but it is difficult to see significant inflows into the asset class in the inflation/ Fed tightening environment. When and

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if core rates stabilise though, the outlook for EM credit will be much brighter.

With regards to our investment strategy and area of focus within credit, in terms of opportunity and risk, our view remains similar to last year: macro factors – inflation, core rates, Covid-19 – are the biggest risk factors for EM credit. We believe, however, that events and volatility within the asset class provide for good

alpha-generation potential. In H1, we will focus on turn-around in Tunisia, restructuring in Zambia, and potential de-escalation in Ukraine/ Russia. We will also be paying significant attention to Turkey and CEE rates markets.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CREDIT CHAPTER

“SHORT DURATION HIGH YIELDING CREDIT WILL BE THE SWEET SPOT FOR INVESTORS IN 2022, PARTICULARLY GIVEN THE MARKET EXPECTATIONS FOR HIGHER GOVERNMENT BOND YIELDS ACROSS DEVELOPED MARKETS.”

PHILIP CRATE

PORTFOLIO MANAGER, ALTANA CORPORATE BOND FUND, ALTANA WEALTH

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022 is going to be a tricky year for credit investors. Inflation concerns will pressure central banks into withdrawing their asset purchase programmes and to start hiking interest rates, which will put upward pressure on government bond yields. We expect the Fed to undertake a faster pace of taper, which will give them greater optionality for an earlier liftoff in rates, and two, if not three, rate hikes. We also expect the Bank of England to raise interest rates, while the ECB is likely to remain on hold. A supportive and continuing accommodative ECB versus a more hawkish Fed is one main reason why we prefer EUR over USD credit entering 2022.

A rising yield environment will likely result in negative total returns for investment grade credit across the major currencies, although high yield is expected to eke out a positive return (+2 per cent – 3

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per cent), given higher carry and another year of low credit losses, as 2022 is expected to be a benign year for defaults.

The rapid spread of new Covid-19 variant Omicron could negatively affect credit performance in the early part of 2022 by triggering further restrictions across economies, with negative implications for travel and consumer discretionary sectors. We would view any selloff among the better capitalised players in these sectors as a buy opportunity. Putting these specific sectors to one side, we do not anticipate that the new variant will trigger any drawdown of a similar magnitude to March 2020.

Overall, we expect credit risk premiums to finish 2022 broadly where they started. But they will face periods of volatility as credit spreads widen on concerns about the inflation outlook and central

bank responses, as well as new Covid-19 headlines. At some point, dip buyers will be attracted, and the widening will be reversed ahead of the next headline. We also expect dispersion for sector performance to increase, and this will provide opportunities for the better credit funds to outperform.

Given our opportunistic and flexible trading strategy which focuses on short duration event-driven credit, our fund is wellpositioned to outperform again. Short duration high yielding credit will be the sweet spot for investors in 2022, particularly given the market expectations for higher government bond yields across developed markets.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CREDIT CHAPTER

“WE EXPECT DEMAND FOR OIL TO CONTINUE TO RISE, WHICH COULD LEAD TO A BUSY YEAR FROM A CAPITAL MARKETS PERSPECTIVE.”

AMINE NEDJAI CEO, ALPHA BLUE OCEAN

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ith the labour market healing and inflation increasing, the Fed is taking on a more hawkish stance, which is causing the short end of the yield curve to increase rapidly and, in return, credit spreads have increased as well. The Fed will be less accommodative, which will cause credit spreads to rise further as investors demand higher premiums, especially at record high duration levels, meaning the market is very sensitive to interest rate increases.

What is particularly worrying is the amount of leverage raised over the past years and, while large profitable companies have been able to strategically raise debt to shore up their balance sheets, a lot of companies will have to tap into the market in 2022 to refinance their debt, and the medium- and small-sized firms may find themselves in

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a very difficult situation as investors ask for higher premiums. Given our focus is hybrid debt, we view this as an opportunity whereby many companies will be able to benefit from our alternative financing model.

At ABO, we provide flexible hybrid financing solutions which can be viewed as mezzanine type debt that does not require cash redemption. This approach provides companies with the flexibility to redeem in either cash or shares, depending on what is most suitable for them at a particular time. As markets become even more volatile, issuers will want to secure funding for the next few years using our products in the knowledge that we are committed to financing them no matter the market conditions. The main risk will be the drop in stock market liquidity, especially in the small-caps segment, which

exacerbates volatility further and requires greater fine-tuning to our structured products. As for sectors, we believe oil and gas could be interesting given the level of underinvestment and the number of recent bankruptcies over the past years which has caused drilling in US to drop significantly. We expect demand for oil to continue to rise, which could lead to a busy year from a capital markets perspective.

Furthermore, we continue to focus on healthcare, and we expect this sector to continue to do well. As the sector continuously innovates, it will attract capital flows, especially in nascent parts, such as longevity, and the supply of companies coming into this space will be competing heavily for this capital which presents a great opportunity for us.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CHAPTER FOUR

ESG

ESG CHAPTER “WHILE ESG POLICIES WERE PREVIOUSLY A ‘NICE TO HAVE’ ADDITION FOR MANAGERS, TODAY MANAGERS MUST HAVE APPROPRIATE POLICIES AND PROGRAMMES IN PLACE FOR BOTH INVESTMENT AND BUSINESS PRACTICES.”

JAMIE KRAMER

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HEAD OF THE ALTERNATIVE SOLUTIONS GROUP, JP MORGAN ASSET MANAGEMENT

e expect to see a continued growth in appetite, as hedge fund managers increasingly seek out the alpha associated with companies making sustainable transitions that are not yet priced in by the markets. Investors will continue to look for and encourage hedge fund managers to enhance their business practices through the development and improvement of Corporate Social Responsibility programmes, with a specific focus on diversity, equity, inclusion (DEI) and the environment. The traditional approach to ESG exclusions will likely not be enough for many investors, particularly those that question the merits of divestment and are increasingly looking to drive change via shareholder engagement and responsible stewardship.

While ESG policies were previously a “nice to have” addition for managers, today they must have appropriate policies and programmes in place for both investment and business practices.

On our platform, ESG policy adoption has increased to over 90 per cent, and we have a proprietary ESG integration framework by which we assess managers. For environmental factors, materiality

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varies across manager types (for example, sophisticated quant managers with heavy data usage are likely to have higher levels of energy consumption), while the relevance of climate-related risks to investment managers is generally quite low versus other types of companies. We view governance as being about having strong procedures, controls and oversight in place to monitor the business, including compliance programmes, audit timing, segregation of duties, valuation and cash movement.

On social criteria, diversity is a focus and a top priority – we believe both diversity of talent and thought can help enhance investment returns. Over the past two years, we have met with nearly 100 diverse managers (nearly half have been run by women), to help broaden the platform’s impact on diversity in the hedge fund industry. We track diversity in our propriety database and 26 per cent of JPMAAM capital is invested in diverse managers. We require a diverse slate of candidates for all manager searches and have a 50 per cent diversity goal when investing in emerging managers.

We believe the exponential growth in relevant data is the future of

ESG investing. This will increasingly come from both standardised data that issuers will be required to disclose, and the unstructured data that will increasingly reference ESG. As reporting becomes more standardised and data becomes more readily available, we should start to see a proliferation of sustainable offerings from macro, quant and multi-strategy hedge funds, in addition to the long only and long/short strategies we’re primarily seeing today.

In Europe, we will start to see the effects of standardisation among regulatory bodies. SFDR is also laying the groundwork for how asset managers will apply sustainability in the US. Multiple markets in Asia are also implementing ESG reporting regulations for issuers and asset managers, particularly with regard to climate-related risks. We are already beginning to see this with the initiation of TCFD-aligned reporting standards in Singapore and Hong Kong. While ESG rules and regulations can help to provide guidelines for issuers and asset managers, without standardisation, there is potential for investor confusion.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ESG CHAPTER

“...UNTIL RECENTLY, ADOPTION OF ESG PRACTICES BY HEDGE FUND MANAGERS HAD BEEN MODEST. BUT, IN THE PAST SEVERAL MONTHS WE’VE SEEN GROWTH IN IMPACT-ORIENTED STRATEGIES OFFERED BY HEDGE FUND MANAGERS.”

PETE KELIUOTIS

EXECUTIVE VICE PRESIDENT AND HEAD OF ALTERNATIVES CONSULTING, CALLAN

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here’s certainly more interest in ESG; we’ve seen that growth for years and, originally, it was more focused on the traditional side of the market. Now, ESG considerations affect all asset classes and client types. Callan has regularly worked with clients to help them identify managers whose investment practices are consistent with their ESG policies, whether that means having more of an exclusionary screening, or having more impact-oriented investment strategies. So, we’ve witnessed a growth of interest there.

Within private equity we have seen widespread adoption of ESG factors as investment considerations for several years now, particularly by larger managers. And in real assets we’ve seen expanded investment in renewables and use of green building technology. However, until recently, adoption of ESG practices by

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hedge fund managers had been modest. But, in the past several months we’ve seen growth in impact-oriented strategies offered by hedge fund managers. One example is activist investors targeting integrated oil companies to try to persuade them to pivot towards renewables.

Some of our clients are interested in ESG integration at multiple levels: not just how these strategies are implemented at the portfolio company level, but also in understanding what a GP has done at the management company level.

We have an ESG consulting practice led by Tom Shingler and comprised of senior consultants and research professionals across the firm that work with Callan clients to create and implement customised ESG policies and procedures, as appropriate for their goals and governance, and to develop a strategy to implement

these policies. Also, Callan is a PRI signatory, and we’ve instituted ESG practices within the organisation and as a result of our manager relationships.

Finally, DEI (diversity, equity, and inclusion) is an area of increased emphasis by Callan, its clients and its managers. We have revamped our efforts to promote DEI within the organisation, train our employees, and step-up recruitment of diverse candidates in hiring. With respect to managers and strategies, we have expanded our data collection efforts to better measure changes and compare firms and have increased the inclusion of diverse firms in our manager searches.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ESG CHAPTER “ALLOCATORS ARE FOCUSED ON IMPROVING HEDGE FUND ESG PRACTICES. THIS IS NOT A FAD. MANAGERS WILL NEED TO EVOLVE, REGARDLESS OF THEIR STRATEGY FOCUS. THE BEST ONES ARE ALREADY DOING SO.”

GEORDIE COX INVESTMENT MANAGER, CARDANO

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edge funds have been slower to demonstrate integration of ESG considerations into investment decision-making. Often citing a lack of relevancy, robust data sets and the costs of reporting. There has also, in our view, been a lack of understanding as to what ESG actually means from an investment perspective. Often, we find managers are considering these factors in investments (e.g. governance), but have not historically seen this as “ESG”.

We comprehensively rate over 160 strategies (including equity long only, fixed income, hedge funds and private market funds). Our research shows the above referred to pace of change improving.

Ninety-five per cent of the managers we analysed (including hedge funds) demonstrated positive momentum on ESG issues. Positive behaviours included a growing willingness to engage, more robust ESG selection processes, increased use of data analytics and dedicated sustainability resources. But there remains more to be done; in particular, we would like to see further attention paid to stewardship (where the strategy allows).

We expect this positive momentum to continue. The more advanced hedge funds are already active in this space – increasing commentary/ reporting, as well as incorporating ESG data analytics and signals into their investment models and analysis. We expect this to continue to be driven by: (i) LP sentiment – it will be easier to raise if managers are meeting LP ESG demands; but also (ii) fundamentals – GPs are increasingly seeing markets (pricing/ volatility) affected by ESG factors.

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Our personal approach is asset class specific – for ‘high focus’ strategies where ESG issues can affect the risk-return within the given strategy, we engage with managers to drive better practice. However, we acknowledge that in certain ‘low focus’ strategies (e.g. portfolios with synthetic exposure, low concentration, high position turnover etc.), ESG issues may be less relevant, and we would expect to see sustainability progress to be slower. We classify most (but not all) hedge funds as low focus, meaning we view ESG factors as having less impact on risk-return in the given strategy than in (for example) a buy and hold equity long only strategy with physical positions.

That said, minimum standards apply to all funds – we do not expect stagnancy within hedge funds. There is plenty of opportunity to advance. Our deputy CIO – Keith Guthrie – is co-chair of the IIGGC Hedge Funds & Derivatives working group, focusing on setting clear ESG targets and clarifying consultants’ expectations for hedge funds.

The group is also looking at how hedge funds and derivatives positions can still achieve real-world sustainability impact, which in our view is an area less well-understood and considered.

Allocators are focused on improving hedge fund ESG practices. This is not a fad. Managers will need to evolve, regardless of their strategy focus. The best ones are already doing so.

For us the future of ESG investing falls into a few core themes.

The first – engagement – will become an intrinsic part of asset management services, as ESG data consistency and availability

improves. We expect outsourcing to specialised engagement service providers (aggregating investor positions to maximise engagement agendas on behalf of investors) to be a growing trend Secondly, ESG data (and analytics to process) will become ubiquitous in fundamental company/portfolio analysis. Data providers will continue to grow in importance, but consolidation of data, as well as cross-industry/asset class initiatives such as carbon accounting will increasingly be critical Thirdly, allocators will begin to look beyond seeing sustainability purely as a risk management tool and increasingly focus on the potential positive societal or environmental impact their portfolios could have.

This final bullet is best expressed (albeit by no means exclusively) in our client’s private portfolios, where the increased ability to control and the increased duration that private market strategies offer, provide one of the most powerful toolkits to drive real world impact.

Where public markets lead, private markets tend to follow, so we welcome the extension of TCFD reporting requirements and transition plans to private companies. We also expect to see more attention to sustainability impact disclosures, particularly where private funds are badged sustainable. The FCA is currently consulting on sustainability disclosure requirements and investment labels. The disclosures are expected to refer to the UK green taxonomy, which is also in progress.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ESG CHAPTER “ONGOING POLITICAL ACTIVITY WILL HELP TO DRIVE INTEREST IN ESG IN 2022.

WE ARE SEEING THE IMPLEMENTATION OF VARIOUS NET ZERO POLICIES ACROSS THE GLOBE, INCLUDING THE EUROPEAN FIT FOR 55.”

EDWARD LEES & ULRIK FUGMANN CO-HEAD OF ENVIRONMENTAL STRATEGIES GROUP, BNP PARIBAS ASSET MANAGEMENT

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e think interest will continue to grow for ESG among hedge fund managers and investors in 2022. More investors want ESG disclosure, and this is driving continued adoption of ESG policies across the industry. There is no reason to think this will reverse. As an indicator, ESG-themed ETFs had strong inflows over 2021.

The key themes across the space are easier to articulate for the “E” than for the “S” or “G”. There remain renewables (solar and wind), EVs, batteries, and various parts of the water industry. Interest is growing in hydrogen, smart meters/grid, relevant software applications, recycling, and biodegradable or less toxic products.

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Ongoing political activity will help to drive interest in ESG in 2022.

We are seeing the implementation of various net zero policies across the globe, including the European Fit for 55. This creates investment opportunities and helps to spur ESG momentum. As an example, the EU recently released its Gas Markets and Hydrogen Package, which puts forward legislative proposals to limit methane emissions linked to fossil fuel imports and sets rules for hydrogen to be used in European pipelines.

While US environmental policy has hit a stumbling block in Senator Manchin, do not suppose that the discussions in Washington are over.

The rest of the Democratic party are discussing ways to break the

impasse using executive action or breaking the bill into several pieces.

Further momentum is likely to come from weather events. Weather, in any given year, is hard to predict, but we know the trend is one of warming that causes more intense storms. Just look at the recent tornados in Kentucky that killed over 70 people and caused significant damage. More of this will come, which will increase popular support for conscientious investing. This is especially prevalent in younger generations who next year will all be a little bit older, with a little more money and influence.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ESG CHAPTER “WE BELIEVE THAT, IN TIME, ESG WILL NOT BE LOOKED AT AS A SEPARATE INVESTMENT FACTOR, BUT INSTEAD WILL BE A ROUTINE PART OF THE RANGE OF TOOLS AND PROCESSES THE INDUSTRY APPLIES IN ANALYSING COMPANIES AND MANAGERS.”

LILLY KNIGHT

CO-HEAD OF INVESTMENT MANAGEMENT, K2 ADVISORS

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istorically, ESG investors excluded hedge funds from their asset allocations, as there were few ESG solutions available in the hedge fund universe. We acknowledge that the best practices of ESG integration are still evolving across hedge fund strategies, and indeed all strategies. As a result, we partner with our hedge fund managers as they develop their approaches, rather than prescribe any one singular approach. Our ESG philosophy and long history of responsible investing is grounded in understanding how our approved managers incorporate ESG and DEI considerations within their investment process and across their management company.

Our engagement with hedge fund managers focuses on stewardship and education, with a goal of evolving manager ESG processes, to increase sustainability awareness and appropriate implementation, and to advance the entire hedge fund community along the ESG spectrum. Our investment and operational due diligence teams act as stewards of the assets entrusted to us, and we use our influence to engage constructively with our underlying managers in an open dialogue about ESG philosophies, methodologies, and best practices.

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As part of our work in stewardship, one of the aspects K2 measures over time with respect to individual hedge fund managers is ESG momentum and improvement. We believe that our role as a steward is to educate managers and help them generate and demonstrate positive momentum, or continuous improvement, in their ESG practices.

We recognise that ESG approaches and solutions will vary by client, manager, and strategy. Our purpose is to assess the intentionality, applicability, and quality of the given ESG approach to add value to our investments. We believe that, in time, ESG will not be looked at as a separate investment factor, but instead will be a routine part of the range of tools and processes the industry applies in analysing companies and managers.

We construct tailored portfolios of hedge funds that seek to meet investors’ investment risk and return objectives, but also their differing ESG objectives. Utilising position level or holdings-based transparency where applicable, our ‘ESG 360° Dashboard’ marries traditional ESG scoring metrics with attribution analysis, providing us with a holistic

view of their hedge fund investment through an ESG lens.

ESG advancements within the hedge fund industry are being recognised at a time when the outlook for hedge funds is constructive.

With elevated equity valuations and bond portfolios not providing the protection that they have historically, hedge funds may be an attractive alternative for investors to consider.

When considering the evolving investor appetite for hedge funds over the next year, we see two types of investors. First, the long-term ESG committed investors who historically may not have considered hedge funds as part of their ESG portfolios. This was because, as an asset class, hedge funds lacked transparency and the complexity of the instruments challenged ESG analytics, which historically were designed around long only investing. Second, a younger wave of investors who themselves are new to the ESG investing landscape and are demanding more responsible solutions. Both groups are quickly recognising that ESG investing can now be tailored around hedge fund portfolios.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ESG CHAPTER

“SO, A KEY ISSUE FOR HEDGE FUNDS IN 2022 IS TO ENSURE THAT THEIR DISTINGUISHING CHARACTERISTIC – THE ABILITY TO SHORT – IS RECOGNISED AS A POTENTIAL FORCE FOR GOOD

BY THOSE THAT HEAVILY INFLUENCE ALLOCATIONS.”

JAMES JAMPEL

FOUNDER, MANAGING PARTNER AND CO-CIO, HITE HEDGE ASSET MANAGEMENT

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n 2021, popular culture charged into finance and subsumed many of the old rules. Memes, star power, and a grip on the imagination crushed many hedge fund shorts. On the long side, SPACs provided access to ventures that would normally only be available in private markets.

Since the “E” in ESG refers to an existential risk to the planet, along with potential for huge growth, it’s not surprising that environmental investing has been caught up in the mania. Given that maintaining a robust short book is what distinguishes hedge funds from their riskier long-biased cousins, managing that mania will continue to be a key to success, with certain valuations reminiscent of Internet 2000.

A key challenge for hedge fund short books is that they do not fit neatly into recent ESG constructs, like ‘carbon footprint’ and ‘impact’. Accounting logic demands that if a specific long book has a

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positive carbon footprint and suggests complicity of some kind, then an identical short book must have the same, but negative, carbon footprint and negative complicity. Similarly, if divesting a long position is deemed to have an impact by decreasing a company’s cost of capital, borrowing a position and selling it must also have an impact by increasing the cost of capital.

Regulatory bodies and investment consultants, who are overwhelmingly concerned with long-only portfolios, are grappling with the implications of the above truisms. One of those implications is that a market neutral hedge fund that was short heavy carbon emitters could even claim a net negative carbon footprint, allowing it to shoot up the rankings, and potentially gain assets. It may not seem fair that a hedge fund doesn’t have to go through the potentially painful process of assessing every long holding when it can achieve carbon neutrality

instead by shorting, which is something they do anyway.

Lastly, consider a hedge fund that is levered long and using its voting power to agitate for change among bad actors and laggards.

Would we not want the regulators and consultants to encourage such a strategy? Without allowing shorts to count against carbon footprints, how could such a strategy pass muster?

So, a key issue for hedge funds in 2022 is to ensure that their distinguishing characteristic – the ability to short – is recognised as a potential force for good by those that heavily influence allocations.

The last thing we want to do is penalise engaged but properly hedged investors by assigning them large carbon footprints because we are unable to count offsetting shorts.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ESG CHAPTER

“A UNIFIED FRONT BETWEEN POLITICIANS, PRACTITIONERS AND REGULATORS WILL ALLOW FOR GROWTH IN THE ESG SPACE. THAT GROWTH WILL IMPACT US AS PEOPLE IN WAYS WALL STREET NEVER HAS.”

SEAN TRAGER

SVP, ADVANCED CLEARING AND PRIME SERVICES, WEDBUSH SECURITIES

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he Covid-19 pandemic reshaped the investment landscape.

The hardships we faced as human beings (as well as investment managers) forced us to consider our long-term viability as a species. Health, safety and sustainability are now considered like never before when deploying capital.

We found that investment dollars, in many cases, facilitated growth and change on a global scale, and more specifically that we could change the world in a way that awareness alone could not. Family offices, endowments and institutional investors alike, care about where

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their money is being spent and how it impacts our respective futures.

The volatility faced over the last two years is like nothing Wedbush has ever seen before. That said, whereas we once largely considered alpha and potential draw downs, we now consider the larger impact on our world. The appetite for enacting change socially, environmentally and otherwise is now a paramount component to marketability.

It is unlikely that anyone can predict the future of ESG investment, but we imagine that we will see hedge funds facilitating much of the change that banks do not. It might be an obscure biotech company

farming shrimp that saves our oceans by helping minimise the need for commercial fishing, for example. Agribusiness alone could steer us away from the rocks in combating global warming and pollution.

A unified front between politicians, practitioners and regulators will allow for growth in the ESG space. That growth will impact us as people in ways Wall Street never has. Using our capital to alter the course of history through human rights initiatives, farming, carbon emissions, and biotech will make Wall Street more effective than most non-profit organisations.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CHAPTER FIVE

ALLOCATOR SENTIMENT

ALLOCATOR SENTIMENT CHAPTER

“IN 2020 AND 2021, ALPHA- AS WELL AS BETA-DRIVEN HEDGE FUNDS ALIKE WERE ABLE TO PERFORM AT THEIR BEST FOR MANY YEARS, BUT THIS WILL BE PUT TO THE TEST ONCE MORE IN 2022.”

TILO WENDORFF

MANAGING DIRECTOR AND HEAD OF ABSOLUTE RETURN, PRIME CAPITAL AG

A

fter two volatile but prosperous years for the hedge fund industry, managers and investors alike are faced with a multitude of near-term uncertainties. To name just a few crucial ones, there are uncertainties around the ongoing evolution and impact of Covid-19, and around central bank policies with respect to possible rate hikes, as well as their stance towards inflation and whether it is transitory.

Furthermore, there are geographical tensions, like the ones over in Taiwan or in the Ukraine, and we have ongoing supply chain disruptions, which we can see and feel in our everyday lives. While uncertainty and volatility can be rather unpleasant for classical buyand-hold investors in the traditional asset classes, this environment is very favourable for equity market neutral, relative value and tradingoriented strategies – all of which we believe should be core to a well-

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balanced hedge fund portfolio.

In 2020 and 2021, alpha- as well as beta-driven hedge funds alike were able to perform at their best, but this will be put to the test once more in 2022. With a potential regime shift on the horizon, it is wise to err on the side of caution. With this in mind, we think a low exposure to all market-dependent hedge fund strategies is prudent, and we emphasise a focus on alpha-rich strategies or niches that are independent of broader markets.

Next to the traditional hedge fund strategies, we see a lot of interesting investment opportunities arising from the realm that resides between the world of hedge funds and private debt investments.

We see various interesting alternative credit strategies, with hedge fund-like liquidity, but short-term private debt return profiles. These strategies exhibit a reliable and rich return potential, have little market

dependencies, and a strong security package.

Finally, though importantly, ESG is slowly but steadily making its way further into the hedge fund space. While there are currently no unified investing or reporting standards available, which leaves many open questions (is shorting CO2 emissions heavy stocks positive, for instance?), we are certain that those roadblocks will be overcome sooner or later. Therefore, we have started to survey hedge fund managers regarding their stance on ESG matters and, while the vast majority are still in their infancy, nearly all have started to take this topic seriously. We have been positively surprised by the current state of the industry and we are looking forward to launching more initiatives, especially around improving the environment and our society as a whole.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ALLOCATOR SENTIMENT CHAPTER

“RECENT MONTHS HAVE UNDERLINED THE NEED TO INVEST IN THE MOST ROBUST SECTORS OF CHINA’S ECONOMIC EVOLUTION.”

MARC SYZ CO-FOUNDER, SYZ CAPITAL

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t Syz Group, we see value in alternative UCITS funds. The lower expected returns, mainly due to less leverage and concentration than classic hedge funds, are compensated for by better liquidity. This flexibility allows us to be more trading-oriented when managing an alternative UCITS fund portfolio. We also remain convinced of the value of convertible arbitrage and merger arbitrage strategies that can provide diversification, thanks to their lack of correlation with the wider market.

China’s increasing healthcare needs and medical innovations, driven by rising wealth and an ageing population, are generating new opportunities. China’s population is currently spending a fraction of what developed countries are allocating to healthcare. As Chinese firms roll out broader access to health services, finance biotechnology and medicine to meet demand, we believe this will provide sound entry

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points for investors. Recent months have underlined the need to invest in the most robust sectors of China’s economic evolution.

Regulation and rapid growth have made this challenging, but we believe that the healthcare theme will generate returns. We are working with specialist managers in Hong Kong, mainland China, and the US to follow developments and evaluate the potential of each innovation.

While China’s medical innovations still lag the progress of European and US developers, the resources devoted to improving healthcare mean that the sector looks poised to experience a wave of progress.

More widely, equity markets are reacting to normalising monetary policy. Central banks’ emergency asset purchases lifted markets through the pandemic and undermined the incentive for investors to examine stocks’ fundamentals. This year, we saw an extremely difficult environment on the short side due to the Reddit ‘short squeeze’ and a

lack of dispersion between long and short positions. Large movements at the level of industry sectors followed macro themes. This made it the worst environment for generating alpha in more than a decade for equity managers. All that has now changed, as developed economies’ central banks discuss raising interest rates and tapering their asset purchases.

In the meantime, many investors were reminded of the resilience that hedge funds can offer. As a result, markets are paying more attention to earnings and company outlooks. Over the short term, we therefore expect earnings surprises to translate into increased volatility, as investors begin to differentiate within sectors again. This is very positive for our stock pickers looking for alpha generation.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ALLOCATOR SENTIMENT CHAPTER

“THE INCREASED VOLATILITY WE OBSERVE AROUND THE GLOBE, ALONG WITH RECORD LOW INTEREST RATES AND EXCEEDINGLY HIGH EQUITY VALUATIONS, LED US TO PRIORITISE MANAGERS WHO HAVE THE ABILITY TO PROTECT ON THE DOWNSIDE, WHILE AFFORDING REASONABLE UPSIDE DURING BULL MARKET RUNS.”

YEHUDA SPINDLER

CHIEF INVESTMENT OFFICER, OPTIMA ASSET MANAGEMENT

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hile Optima’s focus is often mandate specific, in general, the expectation for our lower volatility offerings is a continued focus on absolute return and uncorrelated strategies across the CTA, Global Macro, and multi-strategy landscape; for our more directional strategies, a continued emphasis on equity specialists remains in place.

Given our expectations for more pronounced monetary policy tightening, credit remains an underweight exposure. The increased volatility we observe around the globe, along with record low interest rates and exceedingly high equity valuations, led us to prioritise managers who have the ability to protect on the downside, while affording reasonable upside during bull market runs. We remain committed to creating innovative strategies that are both compelling and differentiated in the hedge fund space.

A number of new trends and developments are taking hold within the hedge fund space. Several high-profile firms have been launching

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longer lock-up share classes, particularly within multi-strategy funds, to more effectively compete in terms of attracting talent, while mitigating business risk. On the product side, more hedge fund managers have been launching long-only vehicles in addition to hybrid funds designed to invest across both public and private opportunities. The ability to leverage research within a more flexible investment mandate has been a key driver behind this innovation. Overall, Optima believes these trends will continue to accelerate, as hedge funds expand their scope and research capabilities.

Over our more than 30-year history, we have allocated to both generalists and sector specialists, given our belief that both types of managers have merit in a multi-manager line-up. In recent years, our sector specialist exposure has been expanding as we prioritise managers with sustainable competitive advantages in their respective areas.

From a thematic standpoint, we remain particularly constructive on

the technology, consumer and healthcare sectors, given the strong secular tailwinds. However, we expect to be active in more cyclical parts of the market if we identify compelling stewards of capital.

Emerging managers have and will continue to be an important component of our hedge fund universe. However, manager quality, experience and expertise are of utmost importance and, as a result, we have a very high due diligence threshold across all investment candidates.

As ESG has become a more critical factor for investors around the globe, Optima’s focus on incorporating ESG considerations into the portfolio process has also risen. We are continuously trying to improve the impact of ESG criteria in our manager selection process. As a result, we are refining certain procedures to attempt to ensure that ESG priorities are a primary component of our due diligence process.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ALLOCATOR SENTIMENT CHAPTER

“WE EXPECT MORE HEDGE FUNDS TO GENUINELY EMBRACE ESG PRINCIPLES AND USE THESE TO DRIVE RETURN GENERATION. THIS WILL SATISFY THE GROWING DEMAND WE ARE SEEING FROM INVESTORS FOR SUCH STRATEGIES.”

DONALD PEPPER CO-CEO, TRIUM CAPITAL LLP

T

rium is backed by a family office that takes a traditional approach to alternative investing. Namely, the goal is to stay rich and get richer slowly. This guides us to seek portfolio managers whom we expect to be able to compound steadily, with a strong focus on avoiding or dampening down drawdowns. We will not be chasing equities at current valuation levels, nor will we be making any allocation to long-only bonds and credit. Rather, we are seeking fixed income replacement strategies to back with our own capital.

These strategies include, firstly, Global Convertible Arbitrage. The strategy has demonstrated excellent downside protection, while generating strong positive returns. The universe of convertible bonds has grown hugely in the past 18 months, creating a substantial opportunity set to generate alpha while hedging equity beta, credit and interest rate risk.

A second of our strategies, Global Discretionary Macro, favours a truly global approach, i.e. including emerging markets (with a focus on Latin America and Eastern Europe) to complement the more-travelled G7 markets. This has led the strategy to have strong returns with a negative correlation to equities over its 10+ year history. We expect 2022 to provide excellent opportunities for the strategy.

We have backed a European-focused discretionary equity market neutral strategy driven by an ESG approach that seeks both to engage

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constructively with companies to reduce emissions, as well as achieve uncorrelated returns. We provided seed capital for this strategy almost three years ago and it now has over 30 additional investors.

Returns last year were boosted by the allocation to our quantitative (low net) dynamic equity strategy. This strategy has a 19-year heritage, and we see continued opportunity for that strategy in the years ahead.

In addition, we are incubating a very interesting global equity capital markets arbitrage strategy to take advantage of the huge activity and planned activity in ECM and other arbitrage opportunities over the coming years.

Each of these meets the principle of expecting to deliver positive returns over a rolling three-year period, with low correlation to what we expect to be potentially quite volatile markets in 2022.

Trium has pioneered a hedge fund strategy that has utilised ESG as a means to generate expected alpha. Back in late 2018, while Joe Mares (ex-GLG and Moore Capital) developed the strategy, there were a lot of naysayers who stated they believed that incorporating ESG criteria, would reduce returns. I am glad to say that conversation has well and truly moved on. Investors understand that ignoring ESG criteria is not consistent with trustees fulfilling their fiduciary responsibility.

We expect more hedge funds to genuinely embrace ESG principles and use these to drive return generation. This will satisfy the growing

demand we are seeing from investors for such strategies.

Our ESG emissions impact strategy is a multi-sector fund that focuses on companies in the sectors accounting for approximately 30 per cent of market capital yet causing approximately 90 per cent of global emissions. The industry and specific expertise of the portfolio manager and his three analysts in these defined sectors allows them to identify companies that are embracing ESG, and who they see as outperformers (in the long book) vs ESG laggards (shorts) we expect to underperform in the cross-section of these sectors. As such, we can establish well-hedged long/short trades where returns are driven by idiosyncratic stock vs stock alpha, rather than being whipsawed by factors (e.g. growth vs value) as some broader generalist hedge funds have been.

We, and the family office backing Trium, are big believers that there is incremental alpha to be harvested by investors willing to back emerging managers. It is important not to confuse “emerging” with “novice”. The typical emerging manager we back has well over a decade of hedge fund portfolio management experience. As they embark on launching their own fund, with their own capital at risk alongside ours, we see extreme levels of focus that, along with more reasonable fees (it is a zero-sum game – lower fees mean higher returns to investors) and lower AUM, we believe will deliver an emerging manager premium.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ALLOCATOR SENTIMENT CHAPTER

“WE WILL CONTINUE TO FOCUS ON NICHE MANAGERS IN 2022, IN AREAS SUCH AS SMALL AND MID-CAP ENERGY TRANSITION, FINTECH SPECIALISTS, CHINESE HEALTHCARE, EQUITY LONG/SHORT, AND JAPANESE SMALL/MID-CAP EQUITY LONG/SHORT INVESTMENTS.”

SUZANNE DUGAN

MATT HOEHN

TIFF Investment Management

ASSET ALLOCATION,

INVESTMENT SPECIALIST,

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hile the hedge fund industry not strong returns in the decade after the financial crisis, and had fallen out of favour for some time, it performed quite well over the course of 2020 and 2021. This improved performance, combined with the recognition that the state of the economy and markets may be conducive to active management, has increased flows into hedge funds.

Due to the reasons above, we have seen priorities shift with regards to hedge funds. We have seen a similar dynamic at the industry level.

TIFF focuses on managers who invest in niche and inefficiently priced sectors, geographies and/or asset classes. The managers are often narrow in scope with deep expertise in their investment vertical and have a sustainable competitive advantage – many are capacity constrained. Lastly, we look for managers who have demonstrated their ability to preserve capital in market drawdowns and have shown asymmetric returns.

We will continue to focus on niche managers in 2022, in areas such as small and mid-cap energy transition, fintech specialists, Chinese

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CO-HEAD OF CUSTOMISED

TIFF INVESTMENT MANAGEMENT

healthcare, equity long/short, and Japanese small/mid-cap equity long/short investments.

Our most recent hedge fund investments have been with managers focusing on the global carbon markets and, in particular, managers with exposure to mandatory physical California Credit Allowances.

Our hedge fund programme emphasises strategies that are narrow in scope and deep in expertise, which leads us to invest in specialist managers over generalists.

The majority of our new investments are emerging managers. Some of our longer-term partnerships begin as emerging managers, but transition to being more established.

We continue to believe that US hedge funds who are lagging longonly managers and European hedge funds in ESG, will attempt to include ESG into their investment processes.

TIFF conducts an annual DEI/ESG survey with its hedge fund managers. We launched the TIFF Sustainable Fund in June 2020, which is a comprehensive strategy, including 65 per cent equity

long only managers, 20 per cent hedge fund managers, and 15 per cent fixed income. Managers selected for this strategy have either a thematic focus or have already implicitly or explicitly incorporated ESG into the investment process.

According to Chris Matteini, Head of Investment Research, Sustainability and Equity-orientated assets, it is TIFF’s belief that US hedge funds are slowly catching up to European hedge funds and the global long-only community when it comes to incorporating ESG into their investment process. TIFF’s recent research on the global carbon markets is one example of US hedge fund managers investing in a carbon-reducing asset class.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ALLOCATOR SENTIMENT CHAPTER

“IN 2022, WE’RE LOOKING TO WORK WITH HEDGE FUND MANAGERS WHO ARE PASSIONATE AND WHO ARE CONSTANTLY LOOKING AHEAD IN TERMS OF THEIR BUSINESS PHILOSOPHY AND GROWTH.”

SLOAN SMITH

PRINCIPAL AND DIRECTOR, INNOVEST PORTFOLIO SOLUTIONS

W

e will continue to focus on the multi-strategy space in 2022, as the risk/ return profile for these strategies still looks attractive. In 2020 and 2021, we continued building a core position in hedge funds. We’ve built a core allocation, which is more of a multi-strategy allocation, to solve the issues we’ve experienced with regards to fixed income. These have more bond-like characteristics, but with only slightly higher volatility. Obviously fixed income is very liquid, where hedge funds are not, but these investments were great at keeping risk low, and worked well to minimise drawdowns. Markets have experienced several periods of volatility over the past two years, but we didn’t experience any heavy drawdowns in our hedge fund allocations, which was tremendous.

We prefer generalists over sector specialists. We’re looking for

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robust diversification in our hedge fund portfolios. While we do allocate to equity long/short and to some credit strategies, we like to focus on multi-strategy businesses with good teams, such as the Elliott Managements, the Millennium Managements, the Citadels, who are able to capitalise on areas of a strategy where there’s some opportunity, depending on the markets. In 2021, we saw our multi-strategy firms allocate capital very seamlessly to credit. Our multi-manager platforms were great at mitigating drawdowns and allocating to areas of the market, such as energy and financials.

In terms of new and developing trends, we expect that we might see some more spin-offs from larger hedge funds, especially among star portfolio managers.

In 2022, we will almost certainly spend most of our time on

established names. We conduct annual reviews, and last year we found that managers performed well. We saw a very small percentage of managers getting caught up in areas such as the options market, where they weren’t underwriting the lack of liquidity and blow-up risk but, on the whole, it was very few. In 2022, we’re looking to work with hedge fund managers who are passionate and who are constantly looking ahead in terms of their business philosophy and growth. We ask each manager whether ESG is part of their investment philosophy, and we want to see strategies consider this item in their process over the coming year.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

ALLOCATOR SENTIMENT CHAPTER

“DEMAND FOR HEDGE FUNDS IN 2022 SHOULD REMAIN ROBUST. THIS DEMAND IS DRIVEN

BY THE FACT THAT MARKETS APPEAR TO BE QUITE TOPPY ON SEVERAL METRICS AND, HENCE, INVESTORS ARE CONTINUING TO LOOK FOR BETTER RISK-ADJUSTED ALTERNATIVES, PORTFOLIO DIVERSIFICATION AND SOURCES OF INDEPENDENT ALPHA.”

PATRICK GHALI

MANAGING PARTNER AND CO-FOUNDER, SUSSEX PARTNERS

D

emand for hedge funds in 2022 should remain robust. This demand is driven by the fact that markets appear to be quite toppy on several metrics and, hence, investors are continuing to look for better risk-adjusted alternatives, portfolio diversification and sources of independent alpha.

Additionally, demand for fixed income alternatives should be significant given that the low yield conundrum isn’t likely to be resolved anytime soon, even if rates may increase this year, which of course may also lead to losses on existing traditional fixed income allocations.

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ESG-related strategies are also expected to continue strong demand, both due to regulatory changes, and an ongoing trend towards inclusion of ESG considerations in portfolios. This can be seen across our portfolio of clients, though certainly more strongly for European clients. China and Japan will also continue to be geographies of interest, not just on a valuation basis, but specifically because Japan should continue to stimulate its economy significantly without having to worry as much about the risk of runaway inflation, this should create interesting opportunities.

With the ongoing uncertainty around Covid-19, divergent interest rate regimes, and late cycle volatility, hedge funds should provide investors with independent sources of returns and protection in case of a correction. Having an element of non-correlation/protection also allows investors to take risks in other parts of their portfolios. The biggest risk for hedge funds in 2022 will be an environment of rapid reversals and frequent regime changes, which can lead to managers getting axed.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

CHAPTER SIX

NEW TRENDS

NEW TRENDS CHAPTER

“FOR MANY YEARS, PEOPLE SAID HEDGE FUNDS WERE BORING AND BETAS WERE DOING GREAT. NOW, PEOPLE HAVE REALISED BETAS PROBABLY AREN’T GOING TO CUT IT – SO THERE’S MORE ENTHUSIASM FOR HEDGE FUNDS THAN WE’VE HAD IN A WHILE.”

MIKE JACOBELLIS

CHIEF INVESTMENT OFFICER, NEW HOLLAND CAPITAL

T

he big continuing trend is consolidation and the bigger leaders gaining market share from everyone else, both in terms of the ability to attract and retain talent, as well as the capacity to attract allocators.

Allocators are sticking to a smaller list; it’s easy to give money to a top 50 shop, where there is less career risk. That also dovetails to the prime brokerage space, where they want to deal with a smaller number of clients as well. In general, that sets a good backdrop if you’re in the hedge fund business – the leaders, as long as they generate decent returns, have a tailwind. The counterpoint to that is that it may not necessarily be where the best alpha is; rather, it’s just the best place to

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be in the market if you’re a hedge fund manager.

For us, that makes it even more attractive, especially if you’re looking at the smaller managers where it’s a little harder for them to attract capital. We continue to believe that the best alphas are in things that are capacity-constrained, a little off the beaten track, and which don’t scale easily without dilution.

Our focus is managers with USD50-300 million that can run USD200 to USD700 million, and they have these interesting alphas that just don’t scale. For us, they’re explicitly doing something different that cannot be scaled. We think pure alpha cannot be easily scaled.

2022 will also be the year where certain crypto strategies enter the

mainstream even more, beyond just the beta trades, and become less fringe.

When people are looking forward to expected returns, they are acknowledging that equities and interest rates and credit are not going to hit the bogies they need. For many years in a row, people said hedge funds were boring and betas were doing great. But now, people have realised betas probably aren’t going to cut it – so there’s more enthusiasm for hedge funds than we’ve had in a while, simply because the alternatives don’t deliver the returns investors need.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

NEW TRENDS CHAPTER

“THE NEXT PICK-UP WILL BE THE OPENING OF BORDERS, WHICH WILL LEAD TO ANOTHER SURGE IN M&A VOLUMES, BECAUSE ULTIMATELY TRANSACTIONS ARE STILL BEING HELD UP DUE TO THE INABILITY TO TRAVEL.”

MANOJ JAIN

W

CO-CHIEF INVESTMENT OFFICER, MASO CAPITAL

hen we look at the coming year, areas for us that are particularly interesting will continue to be merger activity.

There will be a high amount of M&A in the Asia-Pacific region – in Australia, Japan, Hong Kong, China, Singapore, and even Asia to Europe. Asia to the US I think will be driven more by geopolitics, and particularly US-China relations. It depends on how they develop, but we do know that several situations or companies are looking at US assets. But again, they’re reluctant to move until the political climate eases.

What has surprised us in recent times is the speed of the recovery in confidence. That is reflected in increased merger and acquisition volumes, and in equity capital market volumes. That’s a positive, and

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that will continue. The next pick-up will be the opening of borders, which will lead to another surge in M&A volumes, because ultimately transactions are still being held up due to the inability to travel, although Zoom is helping.

A lot of what we do is ultimately linked to corporate confidence and investor confidence. There’s significant liquidity around, which is good for board confidence and funding of transactions.

We will see a large number of transactions, and we’re seeing bigger deals happening, which has surprised us positively. Deals are big, and they’re taking place, which is good.

What concerns us is geopolitical news – briefings and movements particularly in or around US-China relations. It can stop transactions

from being announced, or when a deal is announced it trades with significant volatility. Now volatility isn’t necessarily bad, but it is something to be aware of.

Other concerns include closing risk, funding rates, and credit markets. As funding costs go up, board confidence on the margin comes down. As the world has started to normalise, and confidence has come back, companies have been rewarded for corporate activity which is good. As the world continues to function in a post-Covid environment, the biggest concern regarding Covid-19 has been the underlying earnings of a company.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

NEW TRENDS CHAPTER

“IF WE HAD TO BET ON A SECTOR OR A TOPIC, WE WOULD CHOOSE THE METAVERSE.”

JULIEN MESSIAS

M

FOUNDER, HEAD OF R&D, QUANTOLOGY CAPITAL MANAGEMENT

any market pundits and economists are forecasting that inflation will be the key topic of 2022, so it seems already priced in. But, in addition to this known known, there are still many known unknowns and even more unknown unknowns. Will we get back to a new normal with central banks hiking rates? At which pace? Until which level?

At Quantology Capital, we think that the real alpha-maker is dispersion, and that this new paradigm with less dovish central banks will lead to higher dispersion in the equity markets. Since the upcoming policy of central banks is already disclosed, making money is much more linked to company-related events than to global macro.

If we had to bet on a sector or a topic, we would choose the

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metaverse. The success of the movie ‘Ready Player One’ by Steven Spielberg (2018 – the initial book by Ernest Cline is even better!) and reduction of each human being to their individual status increases their need for socialisation through gaming and dealing in the metaverse, thanks to augmented or virtual reality.

But beware, as this investment universe is shaky! Robust asset management and risk management techniques are absolutely needed to generate alpha.

In the broad, short future, an even more psychologically-driven equity market will be at the forefront. Today, the new normal for Generation Z is to invest in financial markets through apps on their smart phones. Thus, it enables many newbies to buy and sell stocks,

with this new generation being far more sensitive to tech-gurus than to fundamentals – just look at the astonishing share run of Tesla, despite all the warnings from old-school fundamentally-driven stock pickers.

Remember January 2021, when this “wisdom of crowds” sparked huge rallies on junk names, such as Gamestop or AMC, causing some big hedge funds such as Melvin Capital to plunge?

Now, institutional investors must take this new power into account, as it is lethal enough to torpedo your portfolio. In 2020, retail investors did better than experts [1]. It’s time to trust, or at least to be inspired by the crowd.

[1] Welch, I, (Dec. 2020) The Wisdom of the Robinhood Crowd, NBER

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

NEW TRENDS CHAPTER

“WE ARE LIKELY TO SEE THE CONTINUATION OF INSTITUTIONAL ADOPTION IN DIGITAL ASSETS.”

KEVIN KANG

FOUNDING PRINCIPALS, BKCOIN CAPITAL

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e are likely to see the continuation of institutional adoption in digital assets. Some of the inbound calls we’ve been getting over the last three months have been very exciting in terms of the profiles of the allocators that we’re talking to.

In the past, there were a lot of family office adoptions, and now we’re talking to endowments, foundations, and even insurance companies. The profiles of allocators coming into this space is a lot more traditional now – we’re seeing the continuation of this institutional adoption.

Another big theme next year will be consolidation – a lot of M&As, I expect, and we’re seeing crypto becoming a lot more mainstream.

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CARLOS BETANCOURT

FOUNDING PRINCIPALS, BKCOIN CAPITAL

I

t’s our expectation to start seeing some of the bigger crypto exchanges consolidate. And then, for those names that haven’t had a presence in the US, we expect them to make a push in 2022.

Looking forward, from our standpoint as a hedge fund, the conversations have changed, and the calibre of people that we’re talking to has drastically. If you look at the overall crypto market, we expect to see a huge push on the metaverse, and to see a continuous push on NFTs, not just on digital art, but also things like music and collectibles. We think all these areas are slowly starting to be developed by up-and-coming companies across the board.

A ton of money will be continuously poured into NFTs and the metaverse, and you’re seeing it from some of the biggest names in the world. Facebook announcing the name change, Square has announced their name change, and their play is metaverse. You even have beer giants like Budweiser tapping into the space, and we will continue to see this trend through 2022.

HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022

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