Macro

The macro team provides expertise to a broad range of alternatives clients including Hedge Funds, Asset Managers, Proprietary Trading Firms, Pension Funds, Sovereign Wealth funds and family offices.

Macro

Our Macro division specializes in Investment Team mandates across both directional and relative value strategies within the alternatives space. Our coverage spans across Portfolio Management, Trading, Structuring and Research and is tailored to accommodate specific product requirements within the broader asset universe encompassing fixed income, currencies, commodities and liquid credit strategies.


2021: Themes to Watch in the Hedge Fund Space

Methodology

To compile this report, we have reached out to our network of hedge fund professionals to assess their views on the key themes to watch for 2021. The report covers fundamental equities alongside macro and RV strategies across asset classes. While our focus in this report is on discretionary investing, in the conclusion, we will touch on some points of note in the systematic space. The overarching purpose of this report is to inform the reader of which strate­gies in the hedge fund space are most in demand and why.

Introduction

We can be optimistic for 2021 as according to HFM's database, Q3 of 2020 has been the biggest quarterly advance in hedge fund assets for the last five years. This means growth. Generally, investors seem to be more positive on hedge funds, especially in the macro space, due to their ability to provide downside protection and improved liquidi­ty when compared to other investment vehicles.

For the platforms, the 2021 mission seems to be covering "blind spots" in their offering. We have noticed a rising interest in emerging markets strategies, and in more liquid credit approaches. Of course, risk appetites and liquidity requirements vary amongst the big players, and so this will still be an important consideration when management review new strategies. This can create opportunity for small and mid-sized businesses to bring on portfolio manag­ers who do not necessarily fit into the strict risk parameters of the platforms. Moreover, there is an uptick in interest from these typically discretionary focused platforms in looking at systematic portfolio managers, as their infrastruc­ture and technology stacks continue to improve year on year.

Long/Short Equities

2020: A Year of Two Halves
There have been some shocking hedge fund closures in the long/short space this year, with many struggling to fight through March and April. Hedge fund liquidations in Q1 were at their highest level in more than four years, according to Bloomberg. The most notable perhaps was Sloane Robinson, who struggled to raise enough assets to support their strategy. York Capital also decided to shutter their European hedge fund, as the business failed to perform. An­other saddening closure was that of Lansdowne's long/short equity fund which also suffered from poor perfor­mance.

However, it has not been all bad in the long/short equities space. In 2021, as we begin to see economic recovery from the Covid-19 pandemic, the equity markets will see a boost that hedge funds will seek to exploit. The key, as always, will be convincing investors that there is alpha to be found in long/short equity. Towards the end of 2020 we have seen a bounce back from long/short strategies. There have also been some notable launches: Viraj Mehta's Arctis Capital ($500mm) and soon another Moore veteran - Rami Abdel-Misih - will spin out his own I/s hedge fund Mane Global backed by $1bn from Louis Bacon. CQS had planned to invest in a spin off equities fund-Landseer Asset Management-but instead decided to abandon the deal, and continue refocusing on their core credit strate­gies. Landseer has gone ahead alone, and the I/s fund is managed by Andrew Billett.

2021: Time to Asset Raise
The prediction for 2021 from fund managers in the space is that there will be more opportunities for asset raising in long/short strategies. This year has allowed successful fund managers to demonstrate their ability to protect against great market volatility. These funds offer investors downside protection through alpha shorts and therefore are a good bet for investors looking to reduce their equity risks. Long/short equity hedge funds with good performance this year should be able to capitalise now more than ever on their good track records.

Growth vs Value: The Quest for Alpha
A much-discussed topic in recent times has been growth vs value investing. 2021 will likely see value becoming more of a heavyweight in the fight. With the increased promise of a Covid-19 vaccine, corporate earnings improving this year and the rise in price discrepancies, value fund managers have all the tools at their disposal for a strong 2021. Growth investing (often synonymous with "Big Tech") has risen in popularity over the last few years, and in turn fundamental investing has become less trendy. Over the long term it is true that tech companies may retain su­perior earnings growth prospects. However, "Big Tech" dominance does tend to come and go, and with that value investors should have their window of opportunity to regain some dominance in 2021.

More generally, elevated volatility and market dispersion tend to be supportive for active stock picking. The disloca­tion of the equity markets at stock and sector levels will provide opportunity to drive strong alpha returns. Though market neutral equities strategies historically have shown more consistent returns through market cycles, directional strategies come up trumps in post disruption performance as markets normalise. Typically, we should expect medi­um term reversion characteristics following the extreme dislocations which means that 2021 will see the return in popularity of directional long/short investors. Though the preference among investors remains for these strategies to be relatively low net. In the platforms, RV fundamental equities strategies seem to be most gravitated towards as they have no directional or tail risk, and thus fit more neatly into the stricter risk parameters.

Trending Strategies & Skillsets
"Value plus catalyst" strategies are uniquely placed to perform well through market volatility, as they are able to capitalise on events which could release or deplete value. It is through the identification and monitoring of these catalysts that portfolio managers can gain an edge over the purely fundamental research process. In this market, platform funds are looking for portfolio managers whose strategies can provide diversity and low correlation to oth­ers in their business. So, for 2021 platforms will be looking out for long/short investors whose strategies have a "twist" which may make them more attractive to external investors.

Quantamental equities has experienced a market buzz recently as opinions differ on whether this strategy could prove valuable to fund managers, especially in the Covid-19 pandemic. On the one hand, the need to reduce portfo­lio risk and justify fees is extremely high at present. With quantitative tools such as big data and machine learning, fund managers may be able to do so more effectively. However, investors are sceptical of a computer's ability to navigate a crisis effectively. As a result, the need for the "human touch" is paramount to reassure investors. Quan­tamental strategies do satisfy the "twist" requirement that many platform funds are seeking within equities, so we will likely see a continuing evolution of this space in 2021.

Now, more than ever, long/short equity hedge funds must prove their worth largely through the quality of their short positions. Consequently, many funds with these strategies are seeking to consolidate their skillset in the area by hiring analysts with a forensic accounting background. The ability to carry out balance sheet strength and liquidity stress testing for portfolio holdings in order to identify hidden risks.

As in 2020, the discussion on how best to incorporate ESG will seep into 2021. We have seen some larger funds create separate ESG teams to cultivate a house policy and strategy around ESG topics. However, the feasibility or efficiency of this centralised approach is questioned by many. The other angle is to opt for a more integrated ESG analysis within a portfolio. Whether that means adding another layer to the stock screening process or hiring an an­alyst with an ESG background to work with the fund manager, it is important for hedge funds to continue to demon­strate an acknowledgement of the importance of the topic. In 2020, many of the larger funds began to actively strategize on ESG policy. In 2021, smaller funds will need to mirror this behaviour in order to keep up with changing popular investor demands surrounding ESG.

Macro - Introduction

2020 has been a blessing for macro funds, with extreme market volatility paving the way for fund managers to once again make big economic bets. Notably, this makes a big difference for hedge funds that are set up to trade volatility. Prior to this year, the lack of volatility in the market made it difficult for these funds to operate at full steam. Investors pulled money from macro in 2019 and early 2020. Now, with the return of volatility due to Covid-19 and the US elec­tion we have seen some big winners in the space. To name a few, Brevan Howard, Caxton Associates and Rokos Capital have posted double digit returns for the year, and macro has become one of the best performing strategies of 2020. For relative value strategies, March 2020 was one of the most spectacular months in history. They were able to take advantage of dislocation within US basis, and now spreads are wider than they were before the pandemic. Discretionary directional macro strategies are also performing well as they continue to be able to capitalise on cen­tral bank movements and analyse secular and cyclical forces.

There have been some notable launches this year. Maniyar Capital Advisors began trading in March 2020 with $1.5bn AUM. The "man and machine" strategy was spun out of Tudor by Dharmesh Maniyar and seeks to target dis­locations in the volatility markets and distortion in fixed income spread markets. The fund uses quantitative tech­niques, but ultimately Maniyar makes the final decision on investments. Another volatility focused hedge fund launch this year has been Alessandro Cipollini's Ermitage Capital Management. An ExodusPoint spin out, the strategy also looks at rates relative value.

Volatility is an interesting area for macro as many have lost significantly by being on the wrong side of the trade. "Shorting volatility" has been a shaky strategy historically, and the strategy is susceptible to sharp losses. This year, short volatility strategies have struggled across the board. However, come 2021 there should be a lower volatility environment, paving the way for these short volatility strategies to claw back what they have lost. Options strategies are still viewed with some scepticism by the likes of Brevan Howard, but the more vol focused shops are hungry to onboard new volatility strategies as we edge into 2021. To trade options, hedge funds need a robust operations and infrastructure set up. Since options strategies are very vol intensive, the funds that tend have been more interested in these strategies historically are ones with volatility at their core. A key example of this would be Capstone, who have an almost systematic approach to volatility, and look for portfolio managers with clearly denned vol strategies fo­cused on dislocations especially within cyclical products.

In 2021, we can expect a continuing resurgence of macro hedge funds. As we begin to see a recovery, the impact of a potential no deal Brexit and the nature of the US-China relationship will become clear. It seems that investors are largely bulled up on 2021 following the announcement of the approved Pfizer vaccine for the UK.

Macro

Rates
Looking to 2021, within rates there is perhaps a more limited opportunity set than in previous years. While rates strategies have dominated many macro funds for the last 5 years, 2021 will see a shift towards FX and liquid credit. This will be discussed in the next section of the report. Of particular note is the shift to Emerging Markets curren­cies, an area which has proven the most popular alternative for 2021.

There have been a few interesting developments recently. The LIBOR transition continues to be delayed, and the cessation date has been newly set for June 2023 for most USD LIBOR tenors. This will be good news for many working in treasury rates, as there is still very little liquidity in the risk-free product.

2021 will likely see a wider money market basis in EUR. Again, the important considerations for fund managers will be stronger economic growth and continuing positive developments in tackling Covid-19. It seems as though in 2021 the risk reward is for wider basis in EUR. With continuing stimulation of the economy from the FED and the Treasury, higher inflation is a definite risk for 2021 and the curves should reflect more term premia for that.

FX
The opportunity set in FX will likely continue to prove fruitful into next year. Since short term rates are most proba­bly going to be on hold for 2021, the market will shift to currencies. FX has had a pretty flat curve for the last 3 years, but now we are beginning to see growth.

Currency markets offer an opportunity set which has been comparatively subdued in government bonds. The mar­kets remain jumpy, as demonstrated by the fall of the pound due to Brexit no deal anxiety in December this year. Fund managers will likely have to resort to FX to generate higher returns. These fund managers will have to brace for volatility in the asset class, and more conservative risk takers must adjust their appetite for vol.

Emerging Markets FX strategies will be championed by many funds in 2021, as the weak dollar means that local currency will be favoured. This will be discussed in more detail in the "Emerging Markets" section of the report.

Liquid Credit
The interest in credit from macro funds is typically cyclical. We have seen a recent increase in interest from our macro clients in taking on strategies in liquid credit. These hedge funds, which are typically more focused on rates and FX, have historically been wary of credit strategies due to the limited liquidity that they provide. As a result, the interest lies more in liquid credit relative value strategies.

Credit spreads are still higher than before the Covid-19 pandemic meaning that there is definitely an attractive re­turn proposition. There will continue to be a bias towards higher quality segments of credit, such as investment grade, as fund managers are way of the rising default rates in lower quality areas as a result of Covid-19. The invest­ment grade corporate bonds are still in demand as the spreads have further room to tighten. Since the backdrop for corporate bonds is relatively supportive, and given the current interest rate environment, holding these bonds will help fund managers boost the income and yield of their portfolio.

On the less liquid side, many macro funds are looking to get into the mortgage backed securities space, as tighter underwriting as a result of Covid-19 will increase the credit quality of new assets. Agency MBS is the most interest­ing for macro funds as it is a more liquid product.

Within credit, the emerging markets offer a particularly interesting proposition, which will be discussed in the next section of the report.

Structured Credit
We have noticed a sharp uptick in our macro/RV clients looking to expand into the structured credit space. In partic­ular, Agency Mortgage Backed Securities strategies are in demand. These strategies offer the most liquid form of structured credit. From an investor standpoint, structured products in the current market environment offer an at­tractive prospect. Our clients are largely focusing on the US MBS market as this is viewed as the space with the most opportunity due to its size and the nature of government securities.

A relative value approach is highly favoured within this space, and some of the most interesting strategies are those which seek returns from RV in futures, treasuries and swaps. Hedge funds that have previously had very little expo­sure to the credit market, are now looking to begin their efforts with MBS.

Emerging Markets
According to Bank of America's survey, investors have picked emerging markets as the top trade for next year. The weakening of the US dollar under the increased stimulus offered by Joe Biden is intrinsic in the optimistic feeling surrounding EM. This weaker dollar will allow developing world central banks to keep interest rates lower and thus should spur on growth. It also offers the potential of currency gains in EM to foreign investors. EM FX will be one of the top strategies for 2021, in particular those that focus on the LAT AM or Asia region. China and Korea are poised to do well in 2021 as they have rebounded from the pandemic, and there are high hopes for US-China relationships under Joe Biden.

Another area experiencing a boom is emerging markets credit / debt strategies. In particular, sovereigns and local currency debt have registered positive gains. Towards the end of 2020, investment grade sovereigns (often viewed as the part of the strategy with the least risk) have led the charge. This is due to an improved confidence in a swift economic recovery and an easing of financial conditions.

Some of the biggest leaders in the EM space this year have been Pembroke and Kirkoswald. Though these funds are almost exclusively EM focused, we will begin to see hedge funds which are typically more GlO focused creeping into the EM space in 2021 in attempt to make the best of the large opportunity set on offer. This will mean more competi­tion in the market, and certainly the return of emerging markets as a trendy and trending strategy.

Commodities
For commodities strategies, this year has been disruptive. Since seasonality is key for commodities, having that bro­ken with Covid-19 has left a raft of new and interesting opportunities. There has been a spectacular rebalancing in the market, which combined with a pulling of demand from China in a short time frame, has shocked many traders in the space.

In 2021, commodities fund managers will look to exploit massive mispricing in the markets. From a fundamental standpoint, the rebalancing has already happened so making intelligent long / short calls on particular products should yield strong returns if done so effectively. We have seen copper prices rise to their highest level in almost 7 years, and precious metals derivatives strategies are proving an area of interest amongst the platforms. Systematic commodities strategies are also in demand, especially if involving the use of futures or covering the cross commodi­ties space.

This year has seen a dramatic turnaround for Andurand Capital, which had shaky performance over the last couple of years. In 2020, Pierre Andurand emerges again as one of the most successful managers in the space. He bet against the oil price, reasoning that energy would be one of the hardest hit sectors in the midst of the pandemic. He was one of the first to correctly forecast that negative prices are possible. Another winner this year has been Na­nook Energy Advisors, the energy focused commodities investment manager is up 60% YTD and continues to profit from their quantamental approach to commodities investing. A more systematic approach to commodities is cer­tainly in demand amongst the platform funds.

Cryptocurrency
As a side note, cryptocurrencies may become more interesting in 2021 as institutional infrastructure becomes stronger. Stanley Druckenmiller called Bitcoin "better than gold", and there is an increasingly strong industry view that Bitcoin can act as "digital gold". Like precious metals, Bitcoin can be an interesting inflation hedge as we see central bank money printing and stimulus measures rise. Leading the charge is Paul Tudor Jones who has invested 5% of Tudor's AUM in Bitcoin, as opposed to just buying with his own personal capital. Come 2021, we will see an upsurge in the institutional cryptocurrencies strategies as the faith continues to build in "digital gold".

Conclusion

In conclusion, hedge funds can expect better trading conditions in 2021. Hedge fund returns in recent years have been on a declining trend, but 2020 has provided the perfect springboard for success. Now, many investors again view hedge funds as a good option for balancing risk and delivering returns. In equities, we will see the return of value investing as a preferred choice. In macro, we will see an expansion of many GlO rates and FX focused funds into liquid credit and the emerging markets. In commodities, we should see continued success as the environment favours real assets. For systematic funds, during this recovery period it will be important to emphasise the human touch in any systematic strategy. Quantamental strategies will stay in fashion, and we will start to see more typically discretionary platforms branch out into systematic strategies as their infrastructure continues to improve. With a fertile asset raising ground in 2021, we can be optimistic for both hiring and growth in the industry next year.