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Macro, Event Driven Strategies Set to Outperform
By Lydia Tomkiw January 4, 2017
A performance bump following the election of Donald Trump has both managers and investors looking ahead to
2017 and considering which hedge fund strategies could outperform the market in a year that will include
several key elections globally as well as the possibility of monetary policy changes. Fund managers with event
driven and macro strategies are especially expecting a better investing environment – and potentially a return to
inflows.
“The opportunity set has increased,” says Arvin Soh, portfolio manager at GAM Alternative Investments
Solutions, of the year ahead.
But it’s not clear that better performance alone will fully reverse the hedge fund market’s stumbles of last year.
“At the same time I also think it will be difficult,” Soh says. “[T]he one thing in aggregate we aren’t sure is
going to change is there is a lot of negative sentiment on hedge funds. [We are] not sure if we will see net
inflows…it’s a difficult environment to navigate.”
Hedge funds in 2016 endured a year of large­scale redemptions, including high­profile pension pull outs, as well
as investor discussions and debates over the size of their hedge fund allocations. Investors pulled $83.1 billion
from hedge funds through November last year, with $2.2 billion leaving the space in November alone. Annual
flows in 2016 are expected to be negative for the first time since 2009, according to data from eVestment.
The new year is at least expected to bring a changed investment landscape, particularly favoring managers that
target big economic shifts.
Potential political and economic changes under a Trump administration – including possible deregulation,
repatriation of businesses, and changes to healthcare and energy policy, in addition to upcoming elections in
France and Germany – present new possibilities for hedge funds in 2017, says David Saunders, CEO of K2
Advisors. Higher stock prices and potentially heightened merger and acquisition activity could help event driven
managers continue their run after seeing their largest monthly net inflows of $1.06 billion in November since
August 2015.
“M&A and event driven type investments should have a fairly robust opportunity set,” he says. “I would
envision 2017 as a year of spikes of volatility.”
Macro hedge funds present another area of possible positive performance. While macro funds continued to see
outflows in 2016, they also produced positive asset­weighted returns, opening up potential opportunities in the
year ahead.
“We think the opportunity set is moving back toward the direction of macro,” Soh says. The space still has
crowding issues, he adds, and smaller, non­directional managers that use options and curves will be most likely
to take advantage of opportunities.
Not all global macro managers are positioned to benefit from a volatile year, argues Mark Doherty, managing
principal at PivotalPath, an investment consultancy.
“We prefer global macro managers that specialize in currency and rates with limited equity exposures,” he says.
“It’s more policy changes that move away from quantitative easing that have suppressed volatility in the
markets.”
While macro and event driven strategies could find opportunities in the new year, the broader hedge fund market
is likely to continue experiencing some pain in 2017 as investors question fees as and look for a better alignment
of interests, says Stuart Blair, director of research at Canterbury Consulting.
“By in large, clients are questioning the value­add of larger funds investing in larger, more commonly trafficked
names,” he says. “Where’s the value­add in owning Microsoft or Amazon? We would have to agree; it’s a pretty
hard sell on what a hedge fund can bring to bear that’s different than a long only fund in that space.”
After a difficult year and large multi­billion dollar shops slashing fees, greater pressure for alignment of interests
between clients and managers is likely to continue, Soh argues. Investors are increasingly eyeing emerging
managers that care less about management fees and are instead focused on out­performing.
“It’s resonating more among the next generation of managers – I’m in this for the incentive,” Soh says.
Hedge funds that show they are willing to act as a partner to the investor through fee reductions will be the ones
most able to retain and potentially grow assets in 2017, Doherty says.
New launches throughout the year will be an important area to keep an eye on and could serve as a barometer of
the industry’s overall health, he adds.
“On the client side, a lot of 2016 was about looking hard at your portfolio and deciding who you want to stick
with and who you want to move on with,” Doherty says. “I’m looking at 2017 more as our clients wanting to
commit capital in bigger sizes than in 2016.”
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