Q4 2021 Outlook: Summary
As we move into the fourth quarter (Q4), markets are in a tug-of-war involving various good news versus bad news debates. COVID-19 cases are declining, but central banks are considering tightening monetary policy. Earnings growth is strong, but year-over-year comparisons will become tougher. Employment statistics are improving, but supply chain constraints persist. These debates and others lead us to believe that certain hedge fund strategies will outperform in a potentially choppy environment.
- Long/Short Credit: Managers engage companies directly on refinancing transactions. An accommodative primary market allows the issuer to push out maturities.
- Commodities: Tightening supplies and increased demand following further reopening of the economy has led to multi-year highs across a variety of commodity markets.
- Event Driven: Record volumes of activity and greater dispersion of outcomes because of regulatory and monetary uncertainties are favoring managers who can produce alpha through security selection and trading.
Strategy Outlook Long/Short Equity We worry than many unpredictable macro factors will continue to challenge managers as earnings are not reliably driving stock prices. Moreover, relatively high net and gross exposures of most long/short managers leave them vulnerable to market disruptions. Relative Value Mixed outlook for relative value strategies—fewer trading opportunities in fixed income due to volatility and dispersion remaining depressed, but certain strategies such as convertible arbitrage benefit from busy new issuance and corporate activity. Event Driven Positive outlook due to continued strong pipeline of events combined with more attractive spreads and greater diversity of outcomes due to increased regulatory and geopolitical uncertainty. Credit Spreads remain near historic tights, which favors trading-oriented strategies such as long/short credit at the expense of more directional ones such as distressed and direct lending. Pricing in structured credit remains inefficient, and managers expect dispersion to persist in certain sectors. Global Macro Managers continue to focus on the outlook for inflation and its implications for monetary and fiscal policy changes, especially in the United States. As policy decisions begin to be implemented, the opportunity set may become increasingly attractive for thematic macro strategies. Commodities A continued tight supply and demand environment will likely lead to relative value trading opportunities. Despite renewed institutional interest, commodity managers have remained disciplined in accepting investments and are managing capacity closely. Insurance-Linked Securities (ILS) Initial January 1 pricing indications appear strong following Hurricane Ida and the European flooding in Q3. Despite tightening over the course of the year, cat bond pricing remains attractive on an absolute basis and relative to high yield instruments.