Alternatives: Evolving to Meet the Needs of Investors

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 with Kevin Baer and Chris Yanney, Co-Founders, CKC Capital.

What is your outlook for alternatives?

We are bullish on alternatives and believe the industry is evolving to meet the needs of investors. Hedge funds remain very useful to investors who can find quality managers with a thoughtful process and a clearly differentiated edge. Global quantitative easing has, in many cases, caused some investors to concentrate heavily on the return part of the risk/return equation without seriously contemplating the importance of the ability to generate outstanding risk-adjusted returns. While the fourth quarter may have been scary, the Federal Reserve’s abrupt turn away from tightening seems to have comforted investors and relieved the concern that we are headed towards a market with a new paradigm. If we see a more prolonged market disruption than we had in the fourth quarter, investors will focus more heavily on risk-adjusted returns and hedge funds with a clear process and a consistent ability to provide an edge will be very much in favor.

What is your outlook for the economy?

We think the U.S. economy will perform reasonably well in 2019 with GDP growth somewhere between 2% and 2.5% for the year. The global growth picture is weaker than it is in the U.S. and, if anything, the economy may slightly undershoot that 2-2.5% expectation. At the same time, it is clear that the Federal Reserve is data-dependent and we think the number of interest rate increases in 2019 will likely be zero. The Fed appears to believe that inflation is under control and close to its target level. We don’t see that changing this year unless there is a significant growth scare and they start to worry about deflation. The known wild cards which could disrupt our view are a lack of a trade deal with China that results in 25% tariffs and a dissolution of NAFTA. Neither seems extremely likely but the market is not expecting either event and if either one happens, all bets are off and we have to quickly recalibrate our expectations.

What keeps you up at night?

What keeps us awake at night is the possibility that pockets of weakness exist that could have a larger than expected impact on the overall credit outlook. An example that could affect the liquid credit markets is the surge in the number of private credit funds and other investors who are engaging in direct lending. The popularity of private credit funds may be leading to deteriorating vigilance in the pricing and credit quality of the underlying loans and could, in turn, lead to an unexpected wave of defaults. Should we see something like that in private credit, performance in more liquid investment grade and high yield markets would likely suffer.