K2 Advisors Second Quarter Hedge-Fund Strategy Outlook

With a broad-based economic reopening coming closer into focus, investors are planning for the next stage in the cycle. Our K2 Advisors team believes geographical, asset class and sector rotations will be key to driving returns over the next 12 months. Brooks Ritchey and Robert Christian provide the team’s second quarter hedge-fund strategy outlook.

We expect hedge-fund managers who shift to securities that have lagged in recent years while hedging out broader market risks or shorting overvalued names will be more likely to generate high-quality returns.

Strategy Highlights

Long/Short Equity
While rising interest rates have triggered a rotation from growth into value, we expect our managers to capitalize on the increased dispersion. Rising inflation expectations should also favor long/short equity investors relative to other longer-duration assets.

Relative Value
Overweight outlook for volatility arbitrage and convertible arbitrage strategies driven by inefficiencies in pricing among various asset classes. Underweight outlook for fixed income arbitrage based on depressed volatility due to excess central bank liquidity.

Event Driven

Spreads have slightly widened but remain tight relative to historical averages. Increases in hostile activity and CEO confidence should be beneficial for the strategy. We believe n attractive opportunity set remains in the more complex merger situations as well as special situations equity, credit, and special-purpose acquisition companies (SPACs).


Long/short credit managers are increasingly focused on event-driven situations given low yields and tight spreads. Uncertainty in structured credit may lead to high levels of dispersion at the instrument, market, and manager level.

Global Macro

Managers remain focused on the macro trends accelerated by last year’s events and resulting accommodative policy mix that has continued into this year. Differences in economic recoveries between regions may provide opportunities for macro strategies.