Trends Watch: December 21, 2017

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   This week, Elana talks to Stephen Cucchiaro, President & CIO, 3EDGE Asset Management.

What is your outlook for hedge funds?

Since the financial of 2008, many hedge fund indices have significantly underperformed major market indices and client expectations while continuing to charge client-unfriendly fees.  However, the need for an ability to generate attractive returns with below-market risk has become increasingly important as the unprecedented monetary stimulus unleashed by the world’s major central banks has distorted market prices, leaving us all with a lower-return world going forward.  Most likely, the hedge fund industry will shake-out underperforming funds, leaving an outstanding opportunity for hedge funds that can demonstrate superior risk-adjusted returns along with client-friendly fee structures.

What is your outlook for the economy?

The world is currently experiencing a global synchronized recovery that is contributing to a rise in economic growth in the U.S. as well.  Narrowing credit spreads and sufficiently positively-sloped yield curves also indicate the market’s expectation of continued growth ahead.  Since the financial crisis of 2008, money velocity and animal spirits have declined, indicating that gains in the money supply have not translated to high growth in the real economy, but rather have mostly served to raise asset prices.  However, should a new round of fiscal stimulus, perhaps including infrastructure spending, tax reform and/or deregulation, occur, then a rise in animal spirits and money velocity could lead to higher growth rates in nominal GDP.

What keeps you up at night?

Equity markets have rallied without a major correction for an unusually extended period of time.  Volatility has reached near record-low levels and, as skeptical market participants feel the pain of missing out, their capitulation fuels new all-time highs in equity prices.  Hyman Minsky once warned about how an extended period of stability breeds complacency and builds economic and market imbalances, sowing the seeds for the next period of instability -- a phase he coined “the Minsky Moment.”  There are a host of economic and geopolitical “black swans” that could reverse market momentum and lead to the next major correction.