Trends Watch: May 11, 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 Annie C. Erner, General Partner & Portfolio Manager, Iridium 77 Partners, LP.

What is your outlook for alternative investments?

Alternative investments encompass a very wide array of strategies. I will focus my comments on actively managed hedge funds. The media has been focused on a few poor-performing, large actively managed hedge funds, which in turn has brought favor to passive funds.  While it is true that fundamental actively managed hedge funds tend to underperform in strong up markets, a well-managed fund should have a positive return.  In downturns, actively managed hedge funds should set themselves apart with solid outperformance. Regardless of market conditions, hedge funds with conservative net exposures and solid fundamental analysis capabilities, strive to pick winners on both sides of the portfolio (long and short). I don’t know when the next downturn will come, but I do believe that actively managed hedge funds are positioned to provide outperformance over the full economic cycle and will continue to excel over the long term. 

What is your outlook for the economy?

We have been in a slow-growth economy for several years. At this juncture, visibility for the economy is unclear as there are many moving parts ahead. The potential implications of changes that are being brought on by the Trump administration including tax reform, immigration, health care policy and deregulation in the financial industry are difficult to assess. The stock market believes that all of these promised reforms will be favorable to the U.S. economy, given the strong market performance since the election. I am somewhat skeptical on some of these policies as I believe that the U.S. economy is part of a global economy and our success is also dependent on the continued growth of our trading partners. Furthermore, our tightening labor force and higher wages are pointing to inflation ahead and further interest rate hikes, which could reverse course the economy into recession.

What keeps you up at night?

I cannot control the markets.  Therefore, I focus my attention on solid fundamental company analysis relative to the economic environment, competitive posture, and company specific dynamics to identify profitable investments on both sides of the portfolio. Often good fundamental analysis can lead to a short position in a poorly run company.  For the most part this works out very well.  But, I do worry!  I worry about external events that can be detrimental to near-term returns on the short side.  I worry about activist investors or other private equity firms that target these same companies as takeovers often with poor outcomes.  It is important for me to weigh these concerns in every investment decision on the short side.