Another Wall Street investor expects a strong year for stock pickers.
Leon Cooperman’s Omega Advisors says active equity managers will be able to take advantage of increased volatility.
That’s according to an investor letter from the equity-focused hedge fund dated January 19, a copy of which was viewed by Business Insider.
“Active management needs asset and individual security volatility,” the letter said, which the firm expects to come.
Increased volatility should come for four reasons, according to the letter:
- “Very friendly Federal Reserve/global monetary policies have dampened fixed income volatility, in turn restraining equity market/individual stock volatility. The Federal Reserve has started to tighten policy and central banks in the Euro area and Japan are likely at their limit of friendliness. Global monetary policies have almost certainly reached the limit of their friendliness and should therefore no longer limit risk asset price volatility to the extent this was the case in the last several years.”
- “Fiscal stimulus is almost certain in the U.S. in 2017 and this change in policy mix, from pure monetary/no fiscal to less monetary/more fiscal, should lift risk asset volatility.”
- “An ever lower standard deviation of U.S. economic growth and inflation explain a portion of currently below-average risk asset volatility and this should reverse given the above average length of the U.S. economic expansion, a greater portion of our growth attributed to the more volatile capex sector, and an almost certain lift in wage and consumer inflation.”
- With Trump’s presidency, the risk of a boom/bust economic outlook has increased. That’s because Trump’s administration has pitched fiscal stimulus even though the U.S. economy is close to full employment. “This is highly unusual — the unemployment rate is typically much higher than current when fiscal stimulus is introduced,” the letter said.
“2016 was a ‘tale of two cities,’ a first half which brought challenges to active stock pickers and tailwinds to defensive/passive investors and a second half which brought the reverse,” Cooperman and Einhorn wrote.
“The critical question currently is which ‘city’ will dominate in 2017.”
Omega isn’t the first to point out the potential for stock pickers this year, with many others expecting a strong year. That would be a change in fortune for many active managers, particularly hedge funds, which have been criticised for lacklustre returns.
Last year, Omega’s flagship fund returned 7.7% net of fees compared to 5.5% for the HFRI equity hedge index, according to the letter. This year through January 18, the fund was up 2.1%, according to the letter.
Last year, the Securities and Exchange Commission filed charges against Omega and its founder Cooperman with allegations of insider trading. Cooperman has said he is innocent and plans to fight the charges.
The firm currently manages about $3.5 billion, according to a person familiar with the matter, and has faced outflows following the charges.