At a hedge fund conference in Zurich this week, a panel of three investment managers: Julian Jacobsen, Managing Director FPP Asset Management; Max von Bismarck (pictured), Managing Partner and CEO for SkyBridge Capital’s international operations; and Adriano Agosti, Chairman and Managing Partner, Golden Peaks Capital, were asked to what degree today’s global political and economic volatility allowed managers to create value through market inefficiencies.
The three managers were participating in a panel discussion chaired by Alexandre Col, Head of Investment Funds at Banque Privée Edmond de Rothschild, at the Hedge Funds World Zurich conference on Tuesday 15 November
Short-termism has been a feature of investor sentiment in recent times. Taking quick profits because of the way markets behave – look at the equity bull rally between March ’09 and March 2010 when the S&P 500 Index rallied over 60 per cent – is highly risky for those with long-term liabilities. There’s a lot of noise in the markets right now. Looking beyond it requires discipline and an ability to read the macro landscape. Agosti said he didn’t think the volatility of recent times had necessarily created short-term opportunities, categorising 2011 as a “challenging” year so far.
“We’ve been engaged in long-term buying since early 2009, picking what we think will be winners. I’d say today’s environment is very challenging from a short-term perspective,” said Agosti. Indeed, the whole ethos of Golden Peaks Capital is to identify valuation inefficiencies in companies, actively engage with management and more closely align the business needs of these companies with their investors to create sustainable value. That’s not something that lends itself to short-termism.
One of the problems of running liquid portfolios, as FPP Asset Management does, is that the opportunities to profit from market inefficiencies are becomingly increasingly harder because of the greater level of correlation across asset classes. 2011 has been very much risk-on risk-off. Markets have swung wildly from one week to the next. FPP runs a series of long-only and long/short funds in emerging markets equities, fixed income and private equity and Jacobsen said that the recent rebound had “nothing to do with quality of assets, it has to do with how much the market has fallen and that’s what scares me. You cannot take advantage of quality ‘afterwards’.”
Whilst not overtly alluding to any specific short-term inefficiency trades, Jacobsen did say that he was moving away from Eastern Europe and more into Asia and Latin America. There’s a chance of getting the same returns out of these geographic sectors as Eastern Europe “with probably less risk” Jacobsen commented. That’s not to say that opportunities have evaporated in Eastern Europe: Jacobsen said he sold Russian Roubles a few days ago due the currency having held out better than other currencies in the region.
Referring to Col’s use of “current” when talking about today’s market swings, SkyBridge’s von Bismarck actually believes we’re entering an age of volatility and turbulence. He cited two macro factors for this: one was that the European crisis (and US debt downgrade perhaps) has accelerated the geopolitical shift from West to East. The second being the sheer explosion in information flow. David Milliband referred to something similar in a recent meeting Hedgeweek attended, describing an asymmetric world where today the individual can affect change at a macro level: look at Egypt earlier this year. The speed of data transfer today is a function of volatility – another example being the Flash Crash in May 2010.
“Turbulent waters aren’t necessarily bad for hedge funds, they have the necessary tool box to deal with it,” said von Bismarck. “However, we’ve not been that excited by directional macro opportunities this year and actually reduced allocation to equity l/s managers to around 10 per cent.”
SkyBridge invests in around 30 to 35 underlying managers based on robust research-driven fundamental views. Perhaps more concentrated than other FoHFs, the top 10 managers make up between 60 per cent and 80 per cent of the portfolio. Where the firm sees really interesting opportunities right now is in the mortgage market where it continues to be overweight. “We have also started to leg into high yield distressed corporate credit and selectively added some tail risk strategies as well,” added von Bismarck.
Agosti said that provided market participants don’t necessarily have a very liquid view “they can find a lot of inefficiencies in today’s markets”.
Within the bond markets one could argue that Italian and Spanish government bonds could represent an interesting convergence bet on the long side although that might be taking a mid-term optimistic view to the extreme. For now, investors are likely to remain risk-averse.
Jacobsen said that if you believe the consensus view that global growth is going to reduce yet still stay positive, with the way spreads have widened over the last few months there are some attractive yields in Emerging Market bonds and high yield bonds. Depending on the extent of the slowdown capital inflows to Emerging Markets might fall. This would have a pernicious effect on EM equities in particular. “In the scenario where you have okay growth, but not great, you can make a good case for Emerging Market and high yield bonds,” said Jacobsen.