The euphoria of the US presidential election is over. The market jumped under a new wave of optimism associated with an end to fiscal austerity, tax cuts, and regulatory reform, but now the reality has to set in and investors have to see the actual policies and believe they will be effective. This new sense of reality may describe the current price action for asset classes. You can call it mean reversion or a response to an earlier over-reaction.
Stocks have become more range-bound. Bonds and rates have improved after a disastrous rate rise this fall. The dollar trend has lost momentum and precious metals do not show clear direction. The strong gains in base metals have reversed and commodities are showing more de-correlation.
Our general view is that this month is not a good trend-following environment give the directions shown at the end of last month. This should not be surprising. We expect that on a probability weighted basis most time is spent in trend-less markets. There may be gains in selected markets but there are no strong asset class directions that can generate strongly monthly performance.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.
All hedge funds are not created equal as the return box chart shows for the post Financial Crisis period. There is a significant amount of dispersion across hedge fund styles. Over the period 2009-2018, the difference between the best and worst hedge fund category is almost 7 percent after we account for global equities and bonds.
The attraction to private equity and other less liquid alternatives is clear from the Guide to Alternatives by JP Morgan Asset Management. The return profile is much higher for private equity and debt funds than more liquid alternatives and global bonds; however, the dispersion in returns is multiples higher than what can be expected from other public categories.
