Hedge fund managers ready for market changes

Rising rates and the potential for increased volatility might have some investors worried. For hedge fund managers, such market movers mean it’s time to strut their stuff.

Read: Volatility has fund buyers changing investment strategies: survey

Award-winning hedge fund managers spoke about their funds this week at an investor conference in Toronto. One panel of managers focused on how hedge funds can replace traditional long-only strategies.

One way is with a hedge fund using an equity long-short alternative strategy. During periods of volatility, “our shorts aren’t moving the same way our longs are,” explains Jesse Gamble, vice-president and portfolio manager at Donville Kent Asset Management. “So it allows us to generate alpha both on the long and short of volatility. It gives us a bigger menu.”

This year the managers expect to have the opportunity to showcase their bigger menus and make a difference for investors who allocate a portion of their portfolios to alternative strategies.

“We’ve been living in a decade where beta has been king,” says Andrew Torres, founder and CEO at Lawrence Park Asset Management, referring to the increased use of low-cost ETFs. Now, it’s time to consider what you’re paying for, he says. “Using low-cost, efficient assets for your beta [and] capturing alpha from alternatives is a very smart strategy going forward.”

Sean Kallir, portfolio manager at HGC Investment Management, agrees that there’s a place in portfolios for both passive and active strategies. Important for fund managers, he says, is having a clear mandate and sticking to it so investors know what they’re getting for the portion of their portfolios allocated to active strategies.

Within his fixed income fund, Torres says he captures alpha by understanding the nuances among bonds issued by a single corporation, which reveals arbitrage opportunities. Kallir’s strategies include merger arbitrage and special purpose acquisitions corporations.

Bryan Nunnelley, managing director at Crystalline Management, says he’s getting more phone calls about a potential market downturn, with investors looking for uncorrelated assets.

Read: Does your client understand these risks?

For his multi-strategy fund, Nunnelley is targeting returns of 5% to 10% above the risk-free rate. “We need to deliver returns in excess of [the] rising rate environment,” he says. His fund invests in event-driven, convertible securities and fixed income arbitrage opportunities. As the cost of borrowing increases, he expects companies to consider issuing convertible bonds, as they lower costs by raising capital. “That will work well for our strategy going forward,” he says.

Torres notes that rising rates will occur over many quarters. “Don’t think you’ve missed the boat on rising rates, because there’s a lot left to come” as central banks act, he says. “You should be thinking about how do I make my portfolio defensive.”

All retail investors will soon be better equipped to do just that with access to alternative investments, as CSA’s alternatives proposal is expected to take effect this year. The new rules will give retail investors access to the tools of leveraging, shorting and derivatives.

Also read:

Know the limits in CSA’s alternatives proposal

Mackenzie to launch first mutual fund in Canada to use alt strategies

How to adapt portfolios to today’s challenges