By Adam Singleton, CIO – Man FRM: Hedge fund managers have seen weak alpha generation so far this year as markets grapple with uncertainty about the impact of higher rates and geopolitical turmoil. Looking ahead, they may capitalise on greater dispersion and possible higher volatility.
Over the last few months markets have mangled the French aphorism; now it’s plus c’est la même chose, plus ça change. The last US rate rise was over three months ago now, and the fundamental data on inflation, jobs, growth etc has been devoid of shocks, but markets continue to display new levels of tolerance for this uncertain regime. US 10-year bond yields popped their heads briefly above 5% in late October, capping a full 1% rise over the last three months, and equity markets continued their recent downward trajectory: the MSCI World Index is down almost 10% in three months.
Single stock behaviour is similarly detached. The Q3 earnings season was broadly in line with expectations, but stock reactions post-earnings were much more often negative than positive. Outside of the banality of market data and price dynamics, geopolitics remain tragically messy. Risk premia are beginning to reflect the quickly deteriorating panorama across the Middle East, although currently these reflect possible negative future developments rather than a tangible negative impact on financial markets.
All of which points to a widening price of risk in markets right now, through real yields on nominal government bonds, credit spreads, and merger spreads. Throughout the investment landscape there is an increased premium for providing capital and liquidity and the challenge for hedge fund managers now is to capitalise on this alpha opportunity without suffering losses if the picture continues to deteriorate.
