What seemed to be a slight rest at the beginning of the year has turned again to a strong equity bull market. The reflation trade is back as signaled by equity index behavior. Bonds also suggest a reflation trade given the recent talk by Fed Chairman Yellen and other officials concerning the likelihood of Fed action in March. While not a rout, bonds are also signaling a growth trade.
A tighter Fed has translated into a stronger dollar and a precious metals sell-off. However, the commodity markets are more mixed and seem driven by specific market dynamics and not an overall view towards global reflation. Equities are showing optimism that is not present in other assets.
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.
