Seeking returns in a changing market

15 September 2014

“Until now, 2014 has been an ambivalent year for hedge funds. Generally speaking, active management underwent consolidation after an excellent 2013, but already as we look at early September, there seem to be signs of a dramatic improvement”. In a nutshell, expectations are high for the future of hedge funds according to Kairos manager Michele Gesualdi, who keeps a close eye on scenario developments from the Group’s London office.

“Looking at performance in the past few months, we see that the biggest stocks, the classic mega caps, have led the market significantly, while on the other hand, small and medium caps have underperformed almost across the board. In addition, we have seen an inversion in the trends that dominated 2013 and which often created overcrowding in certain stocks and sectors. This caused a correction for many stocks, often even the soundest ones, which has hurt active management. The third factor with an impact,” Gesualdi explains, “has been the sharp drop in interest rates, which has pushed the highest yield stocks to the top, although they often represent no-growth companies.” Now, however, conditions have changed: new space has been created as rates have resumed their climb, tapering is coming to an end in the US and the most heavily crowded trades have been thinned out, while the underperformance of small and medium caps is seemingly over. These conditions create a better context for funds like KIS Multi-Strategy, which we can now expect to end the year with a strong finish. Indeed, many trades stand to generate profits and because hedge funds have more room for maneuver, transactions in all asset classes can be considered.

Gesualdi adds, “With respect to emerging markets, prospects are bright for China and India, with a few potential opportunities in Brazil and Argentina as well. As for equities in developed countries, Europe, with support from its authorities, could certainly surge, whereas in the US, the entire growth area is attracting attention (technologies, consumer discretionaries, industrials, etc). Other important themes are the Euro and the Yen, which could continue to weaken, and the dollar’s strengthening over many currencies. Rates – which are extraordinarily low in the US – are normalizing. If September remains a transitional month, after eight months of slowdown, hedge funds are finally well enough armed to fare well.”