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5yrs ago Hedge Fund hfm.global Views: 186

Which hedge fund strategies will do best in 2019?

We expect low beta strategies to do well in 2019. This includes credit long/short, equity long/short, fixed income arbitrage, merger arbitrage, convertible arbitrage and volatility strategies. The rationale for each of the strategies is below:

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Kunjal Shah

Credit long/short. As we near the end of the current economic cycle and the Fed continues to raise rates, we expect dispersion to appear in credit quality that should benefit fundamental bottom up credit strategies that can generate alpha from longs and shorts and not be a levered carry trade. We have begun to see some of these strategies begin to work in 2018 (especially in September and October).

Equity long/short. Similar to credit long/short, we prefer low beta fundamental equity as dispersion should benefit these strategies. With respect to quantitative market neutral strategies, we continue to hold high conviction managers that have navigated the factor rotations well, but this is more of a bottom up allocation.

Fixed income arbitrage. The taper by the Fed raising rates and also the ECB changing its policies would befit this strategy as historical curve relationships are restored by fundamentals and not distorted by QE. These strategies should be complemented by basis trades and mortgage relative value trades.

Merger arbitrage. We favor these strategies as strategic deals continue to offer compelling opportunities and the current environment where some spreads have widened offer an opportunity to add to the strategy. Also if one were to go back to 2008/2009, strategic deals closed and offered great returns for investors who focused on them.

Convertible and volatility strategies. The repricing of volatility in credit and other asset classes makes these two strategies compelling.

With all of the above we would reiterate that manager selection is key and would be the primary focus for these strategies to deliver on.

What types of hedge funds are you actively scouting for now?

We are looking at disciplined credit long/short managers, equity long/short managers and volatility managers (long vega profile and those that manage their negative carry). Ideally, we like managers that are disciplined about maintaining their Sharpe ratios and hence hard close their funds to preserve their return profile – as opposed to asset gatherers.

How much of your portfolio is in co-investments and what types of investment themes are represented?

This is the primary focus for a new product launch for Lyxor Asset Management Inc in 2019. We have identified opportunities in this space and are moving forward with a product to execute on the strategy.

Which hedge fund strategies are you reducing exposure to or avoiding in 2019?

Lyxor cut back on directional strategies in 2017 and continued to do so in 2018. The primary reason was the length of the economic cycle, Fed and other central bank tapering, and the Fed being ahead of the curve and raising rates.

Are you currently negotiating for lower fee arrangements? What would you say is the typical fee arrangement in your portfolio?

We always negotiate on fees and this is something we have done over the past four years. In some instances as an allocator you do have the ability to negotiate terms. Sometimes the ability to negotiate is limited, for example with hard-closed funds that have delivered strong net of fees returns.

Are you becoming active in ESG investing?

Lyxor has a number of managed accounts which are ESG compliant and this is easier to accomplish via the managed account platform.

Kunjal Shah, Lyxor Americas

Kunjal Shah joined Lyxor Americas in 2014 as the global head of hedge fund research. He is responsible for supervising the portfolio management and hedge fund research teams. Prior to joining Lyxor, he was at Arden Asset Management, where he was a partner and managing director. Before that he was a director and co-head of hedge fund credit risk management for the Americas at Deutsche Bank AG and he was also an integral member of the hedge fund credit risk management team at Goldman Sachs, where he led due diligence and monitoring of hedge funds.  

Investor Outlook 2019: Lyxor Americas research chief Kunjal Shah points to arbitrage opportunities on Absolute Return.


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