The recently enacted second round of central bank quantitative easing may position certain types of hedge funds over others. We continue to favour three strategy types: global macro, equity long/short, and event driven. We have written before about the outperformance of global macro strategies in times of uncertainty and volatility and those lessons continue to apply. We are also optimistic for event driven strategies, because improved liquidity may accelerate the pace of merger and acquisition activity. While we maintain our faith in the ability of long/short managers to create value, high volatility may engender difficult results for high beta funds who position themselves with a high net exposure to the market.
QE2 May Boost Corporate Action Activity
As reflected in the multitude of dividend payment increases, many corporations are flush with cash. This could perhaps be attributable to overly aggressive cost controls and headcount reductions during the crisis.
At some point, companies will feel compelled to tap excessive liquidity for purposes other than investing in low yielding Treasuries, boosting dividends, or buying back shares. There are many fire sale opportunities that await exploitation. Perhaps optimism about QE2 could be the catalyst that may loosen the purse strings. If the easing were to stimulate borrowing further, it is possible that the merger environment could heat up. However, if high risk aversion persists, corporations may continue to hoard cash.
Global Macro May Benefit in a Tail Risk Event
Global macro hedge funds have shown ability to outperform the market over time, distinguishing themselves from other strategies. The currency turmoil which has taken hold amongst the major world powers may create imbalances that such managers may exploit, engendering robust results.
The recent IMF meeting was not encouraging; it, and other government commentary makes it appear that a round of competitive devaluations are on the horizon, exacerbating the conflict amongst the already tense and non-cooperative major economic powers. Decreasing US rates may further motivate countries like Japan and Brazil to intervene and devalue their own currencies defensively. It could also spur asset bubbles in emerging markets, as we see already forming in China. Europe has clearly dug its heels and stayed tight, resorting to VAT increases and spending cuts. However, a strong Euro may be counterproductive for the recovery, particularly if Europe proceeds with a currency policy that is out of synch with other major economies. If competitive devaluations persist, the likelihood of reactive tariffs or trade quotas against inexpensive imports increases dramatically, adding yet another obstacle to balanced recovery.
The information contained in this presentation contains confidential information regarding Diamond Oak Capital Advisors, LLC (“Diamond Oak”) and may contain information regarding hedge funds and other investments recommended or otherwise analysed by Diamond Oak. This document is not an offer to sell, nor the solicitation of an offer to purchase, any interest in Diamond Oak or any hedge funds or other investments discussed herein. An investment in any hedge fund or other investment discussed herein may be undertaken only through such fund or investment, may be speculative, and may involve a high degree of risk. An investor in hedge funds could lose all or a substantial amount of his or her investment.
Certain information contained in this presentation has been obtained from sources outside of Diamond Oak and its affiliates. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and neither Diamond Oak nor its affiliates takes responsibility for such information. Past, pro forma, hypothetical, projected, or suggested performance of any investment or portfolio of investments is not necessarily indicative of future performance.
This document is neither advice nor a recommendation to enter into any transaction with Diamond Oak or any hedge fund or other investment. This presentation and its contents are proprietary information of Diamond Oak and may not be reproduced or otherwise disseminated in whole or in part without Diamond Oak’s consent.
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