K2 Hedge Fund Strategy Outlook: Second Quarter 2022

The Russian invasion of Ukraine has added pressure to the inflationary cycle that began in late 2020. Our K2 Advisors team opines on how hedge fund managers are viewing the situation in its second quarter 2022 outlook.

Second Quarter (Q2) 2022 Outlook: Summary

Last year’s headlines (COVID-19 and China) have been replaced with new concerns (Invasions and Inflation). Central bankers are pivoting from stabilizing growth to limiting inflation. Traditional bond and equity markets have come under pressure as they adjust to this new regime. Hedge fund managers are once again excited by the long vs. short investment opportunities. While the beta uptrend in stock and bond markets may have stalled, dispersion has improved the outlook for alpha-driven performance.

Strategy Highlights

  1. Commodities: The Russian invasion has led to tremendously elevated commodity volatility and dislocations across most markets. Historically, higher levels of volatility have led to a richer opportunity set across both directional and relative value trading strategies.
  2. Relative Value: Elevated levels of volatility across and within asset classes are offering improved trading opportunities.
  3. Global Macro: Managers focusing on macro factors like changing economic data, central bank policy shifts, and geopolitical developments may face a rich opportunity set for both medium-term themes and short-term trading over the next several months.

Macro Themes We Are Discussing

In the past, some of the largest causes of market cycle regime shifts have been due to dislocations caused by a change in interest-rate policies, elevated levels of inflation, and/or some type of military conflict. As we draft this overview of second quarter themes, we note that all three of these macro events are capturing headlines today. In short, the Russian invasion of Ukraine has added pressure to the inflationary cycle that began in late 2020. In response to these inflationary pressures, many central banks have indicated that policy interest rates will shift upwards.