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
T
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
