The current shift away from a single macroeconomic narrative is beneficial for hedge funds, says Man FRM – but a victory for Marine Le Pen in the French presidential election could derail things.
New market commentary by hedge fund manager Man FRM blamed the poor performance of the alternatives sector throughout 2016 on a single pervasive narrative, namely, the Trump reflation trade.
The victory of Donald Trump and Britain’s decision to exit the European Union conspired to cause markets to correlate around one common thesis, it said.
But Man FRM is hopeful about the remainder of 2017 because hedge funds should be able to fund “multiple uncorrelated sources of idiosyncratic return”.
As far as hedge funds are concerned, “overly dominant agenda-setters” are bad news when it comes to generating a broad range of active investment returns (or ‘alpha’).
However, one clear risk to the improved environment for hedge funds is the French presidential election on 23 April. A second run-off election, if required, will be held on 7 May.
A Le Pen victory would renew the populist, reflation thematics associated with Trumps’ November 2016 win and the Brexit vote, Man FRM said.
“We remain convinced that a shock Le Pen victory would be bad for both markets, especially from these more elevated levels, and hedge fund alpha potential, as correlations would most likely rise again to reflect the uncertainties of political risk,” it said,
As for Trump, Man FRM pointed to the “mess” around the last-minute pullout of the Obamacare repeal and the apparent shortcomings of the new president's deal-making style.
“Our invested managers now have a more diverse set of views on the ability of Trump to enact his agenda,” Man FRM said.
“If nothing else, we think that a plurality of views on the efficacy of the Trump administration is a healthier state of affairs for hedge funds than the tight alignment of opinion that followed his election in November 2016.”
Whatever happens in US or French politics in the next month, there is still a “pleasing array” of sources of macroeconomic risk and potential opportunity for hedge funds.
“The Fed is raising rates while the European Central Bank is increasingly wary of tapering; volatility is returning to the oil price which has led to dispersion in credit markets as energy producers come under pressure again; a stronger earnings outlook means there are more corporate winners and losers and M&A activity remains high; Article 50 has finally been triggered by the UK, and so on,” Man FRM said.
“Trading any one of these successfully is rightly difficult – we don’t pay hedge fund fees for nothing – but at least, this year there appears to be enough breadth of opportunity for hedge funds to potentially prove their worth.”