Fourth Quarter 2021 – UBS Hedge Fund Solutions
Strategy Outlook
Q3 2021 closed on a high note for hedge fund strategies, with positive absolute returns showcasing the value of long / short investing.
Highlights
Highlights
- September, in particular, was characterized by increased volatility, an equity market sell-off, hawkish messaging and a jump in rates fueled by inflationary signals.
- Gains were produced across nearly all strategies and played to hedge funds’ strengths of long vol profiles, short exposures and tactical trading.
- We expect months like September to become more frequent, with higher volatility across assets and within rates in particular.
The robust growth from COVID-19 stimulus has peaked, and our macro base case is for reasonably above-trend growth sustained by a mix of drivers. Consumer demand is buoyed by higher wages and surplus savings accumulated during the pandemic. The capex cycle is restarting as companies become less hesitant to invest. Last quarter, we detailed how pressures on supply chains, wages and owners’ equivalent rent (OER) could support persistent and higher inflation. Not only is there a temporary logistics disruption from COVID-19, but there are structural concerns such as a retreat from globalization and retooling of supply chains, rising energy and transportation costs and impacts from ESG targets. Q3 2021 illustrated this last point with the energy and electricity price shock which left countries scrambling for hydrocarbons and saw factories idled. However, because growth should also be resilient, we do not see a great risk of stagflation in the near term.
Q3’s robust growth and inflation signals also catalyzed a hawkish monetary policy pivot. As central banks begin to tighten, it falls on fiscal policy to stimulate continued growth. In the US, the outcome of sweeping policy negotiations remains uncertain. Meanwhile, market risk looks increasingly asymmetric to the downside, with full valuations and tight spreads which could be increasingly vulnerable to surprises. In China, new regulations to further common prosperity are challenging, but we expect the environment for hedge funds to improve as the policy roadmap becomes clearer. The recent difficulties for Evergrande and the overleveraged property sector has been profound and presents an interesting opportunity for distressed investors who are able to identify high quality credits.
Portfolio positioning
Portfolio positioning
Amid the current macro backdrop, we continue to favor low net Equity Hedged and Commodities Trading strategies and have added marginally to those exposures
- Additionally, we are looking to initiate exposure to China high yield with a bias toward the property sector to take advantage of the current dislocation.
- Small trims are being made in Capital Structure / Volatility Arbitrage and emerging market (EM) Discretionary Trading to fund Commodities managers and increase exposure to Fixed Income Relative Value (FIRV).
The robust growth from COVID-19 stimulus has peaked, and our macro base case is for reasonably above-trend growth sustained by a mix of drivers.
CIO model portfolio and sub-strategy outlook
CIO model portfolio and sub-strategy outlook
Equity Hedged
Sub-strategy | Sub-strategy | Target weight % | Target weight % | Outlook | Outlook |
|---|---|---|---|---|---|
Sub-strategy | Fundamental | Target weight % | 21 | Outlook | - |
Sub-strategy | Equity Event | Target weight % | 7 | Outlook | - |
Sub-strategy | Opportunistic Trading | Target weight % | 10 | Outlook | - |
Sub-strategy | Equity Hedged total | Target weight % | 38 | Outlook | Positive |
Credit / Income
Sub-strategy | Sub-strategy | Target weight % | Target weight % | Outlook | Outlook |
|---|---|---|---|---|---|
Sub-strategy | Distressed | Target weight % | 1 | Outlook | - |
Sub-strategy | Corporate Long / Short | Target weight % | 8 | Outlook | Positive |
Sub-strategy | Asset Backed Securities | Target weight % | 5 | Outlook | - |
Sub-strategy | Reinsurance / ILS | Target weight % | 1 | Outlook | - |
Sub-strategy | CLO / Corporate Lending | Target weight % | - | Outlook | - |
Sub-strategy | Other Income | Target weight % | 1 | Outlook | - |
Sub-strategy | Credit / Income total | Target weight % | 16 | Outlook | - |
Relative Value
Sub-strategy | Sub-strategy | Target weight % | Target weight % | Outlook | Outlook |
|---|---|---|---|---|---|
Sub-strategy | Merger Arbitrage | Target weight % | 2 | Outlook | - |
Sub-strategy | Cap Structure / Vol Arb | Target weight % | 5.5 | Outlook | Negative |
Sub-strategy | Quantitative Equity | Target weight % | 4 | Outlook | Negative |
Sub-strategy | Fixed Income Relative Value | Target weight % | 7 | Outlook | - |
Sub-strategy | Agency MBS | Target weight % | 3 | Outlook | - |
Sub-strategy | Relative Value total | Target weight % | 21.5 | Outlook | - |
Trading
Sub-strategy | Sub-strategy | Target weight % | Target weight % | Outlook | Outlook |
|---|---|---|---|---|---|
Sub-strategy | Systematic | Target weight % | 1 | Outlook | - |
Sub-strategy | Discretionary | Target weight % | 15.5 | Outlook | Negative |
Sub-strategy | Commodities | Target weight % | 8 | Outlook | Positive |
Sub-strategy | Trading total | Target weight % | 24.5 | Outlook | - |
Equity Hedged +
- Fundamentals matter again, and we believe long / short managers are well positioned to navigate the uneven impacts of higher inflation on different companies.
Corporate Long / Short +
- HFS may opportunistically increase Corporate Long / Short in China / HK to take advantage of dislocations in high yield.
Capital Structure / Volatility Arb –
- HFS may take profits in Capital Structure / Volatility Arb to fund other strategies where we have growing conviction.
Quantitative Equity –
- We continue to be highly selective within Quant Equity, even after a period of improved performance within the strategy.
Discretionary –
- Although our view is positive overall on discretionary macro, emerging market (EM) allocations and EM beta face headwinds from rising DM yields and various EM hiking cycles.
Commodities +
- Commodities should benefit from uncertainty around inflation and supply side constraints; the resulting volatility should offer two-way trading opportunities.
Strategies
Strategies
