The 2018 outlook for hedge fund and private equity fund returns will be determined largely by equity growth, according to several investment firm reports, although investors should be cautious as fund performance can vary dramatically.
“The hedge fund risk contribution has been fairly steady — though slowly declining — over time. Alpha generation has been deteriorating more quickly, from an annualized 8.2% in the 1990s to 0.6% annualized over the past 10 years,” states Northern Trust in its Capital Markets Review report.
However, rising interest rates — forecasted globally in 2018 — are a better environment for hedge funds, in general, notes K2 Advisors in its 2018 outlook: “We see subdued volatility and artificially low interest rates continuing to revert to more normalized levels in 2018. These trends have already begun to drive increased long vs. short opportunities and performance potential for hedge fund strategy investing.”
K2 continued that Global macro strategies may benefit most from emerging economic trends, “The year 2017 was a challenging one for global macro advisors as generally tight credit spreads, muted inflation expectations, unprecedented — and we believe unsustainable — accommodative monetary policy and some complacency about geopolitical risks somewhat suppressed opportunities for global macro managers.”
Long-short equity managers should be able to take advantage of the 2018 markets, especially because growth sectors that led the way in 2017 may lose attractiveness due to higher valuations and slowing quantitative easing, the K2 report states. Thus, “long-short equity managers see short-side positioning as a particularly fertile environment.” This should also be the case on the credit side.
Other hedge fund strategies that could benefit in a higher rate environment are currencies as well as commodities, “which should slowly grind higher in 2018, further strengthened by investors returning their focus to fundamentals as opposed to short-term concerns. The likelihood of a weak and relatively stable US dollar in the first half of 2018, as well as potential supply disruptions from political events in Venezuela and Africa, could also lift commodity prices,” the K2 report stated.
Private Equity Growth?