Going into the month, there are good up trends in place with global equities and down trends in oil, precious metals, and selected commodities. What is interesting is the inconsistency across some markets sectors. The reflation risk-on trade is still apparent in the global equity indices, but we are not seeing strong evidence of bond sell-off or rally. Oil prices suggest both supply strength and demand weakness. Gold and precious metals are out of favor with long-only investors. The idea that we will have a dollar rally on Fed hikes seems misplaced and there is less risk-on demand for the US relative to the rest of the world.
Generally, we find sector indicators to suggest a more opportunity rich environment for trend-followers especially for those who have a greater tilt to energy, metals, and commodities. Nevertheless, history has proved in the past that performance in managed futures will usually be especially strong if there are well-established bond trends.
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.
