How Hedge Fund Strategies Are Shifting: 'Lower Correlations And Increased Volatility'

Don Steinbrugge is one of the best-known experts in the hedge fund industry, with over three decades of experience in the field. He has been running Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm for almost 10 years now.

Benzinga had the chance to chat with this seasoned hedge fund industry expert, who shared some predictions for trends in the space in 2017. In the first part of this series, we looked into hedge fund fees and how they’ll evolve over the year; in the second part, we went into the why hedge funds will benefit under the Donald Trump administration; and, in the third part, we took a look at asset outflows and why pension funds invest in hedge funds. In this fourth part, we’ll look into some of the preferred investment strategies going forward.

Diverse Strategies

“The hedge fund industry is fund structure, and it is made up of a lot of different strategies. Some of those strategies have high correlation (or high relative movement) to the equity and to the fixed income marketplace. And, what you are seeing is money come out of those strategies and money going into strategies that have very low correlation to the capital markets,” Steinbrugge explicated.

“There are a lot of people concerned that there is a bond bubble, and that interest rates are going to rise [and thus], bond prices are going fall. In addition, people are concerned about the equity markets being expensive. For example, the SPDR S&P 500 ETF Trust SPY's forward-looking P/E is around 17.5x, and the trailing P/E is like 25x, and that's very high relative to historical averages,” he continued.

Asset Rotation

Taking into account the elevated valuation of equity markets and the fact that interest rates are going to rise, a lot of people want to diversify their portfolio, Steinbrugge went on. So, what Agecroft has been seeing is much higher demand for strategies with low correlations to long only benchmarks, which also tend to benefit from increased volatility.

“Some of the strategies that will see a continued increase in demand include: relative value fixed income, market neutral long/short equity, commodity trading advisors (CTAs), direct lending, volatility arbitrage and reinsurance due to their perceived ability to generate alpha regardless of market direction and as a hedge against a potential market selloff," a recent report out of Agecroft explained.