Can investors gain from a changing macro environment?

Thought of the day

Veteran hedge fund investor Paul Tudor Jones plans to close one of Tudor Investment Corp’s funds, the Discretionary Macro Fund, according to Bloomberg. Years of central bank quantitative easing have suppressed volatility, weighing on returns from macro strategies and prompting investor redemptions.

But, looking to 2018, abnormally low volatility may end through a combination of factors, which should create a better opportunity set for macro strategies:

  • Central banks are withdrawing monetary accommodation and rates are gradually normalizing. By the end of 2018, in aggregate, central banks will be withdrawing liquidity from the global system.
  • Political flux, rapid technological change and sustainability challenges will both disrupt particular markets, sectors and companies, as well as provide opportunities to invest in the beneficiaries of these trends.
  • The changing investment context also brings risks. We see the three most prominent as: a significant rise in interest rates if US inflation rebounds or oil prices rise on supply disruption; a geopolitical conflict; and a China debt crisis.

Overall, we do not see cause for alarm. Our base case is for another year of respectable economic growth, higher corporate profits, and rising equity markets. But differentiation should increase. We see scope for greater dispersion in FX markets and differentiation between different countries’ yield curves, creating relative value macro opportunities. Within equities, we see scope for low correlation to create an attractive market for equity hedge strategies. We see an allocation to hedge funds as a valuable part of a balanced portfolio.

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