By Adam Singleton – CIO, Man FRM: We are entering an unusual period for global economic policy, with predictions of multiple rate cuts despite none of the usual reasons for looser monetary policy.
The fourth quarter of 2023 capped a strange year for traditional assets. Despite lingering economic concerns, increasing corporate defaults and a squeezed consumer, equity markets finished the year strongly. The incrementally dovish rhetoric from central banks, particularly the Federal Reserve, buoyed risk assets into year-end and drove down bond yields on the expectation of multiple rate cuts over the next year. This was generally a headwind for hedge fund alpha, since market volatility remained low, dislocations were small and infrequent, and trends in markets have been short-lived.
However, as elaborated at length below, we believe that we continue to sit within a transition period for the global economy on multiple fronts, and that the low levels of implied volatility seen in Q4 2023 are unlikely to last through 2024.