Trends Watch: January 19, 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 Judith Posnikoff, Co-Founder & Managing Director, Pacific Alternative Asset Management Company (PAAMCO).

What is your outlook for the alternative investment industry?

I am very positive on hedge funds going forward into 2017.  I expect the investing environment to be characterized by discrete bursts of volatility within different asset classes (and markets) as investors try to understand the implications of less accommodative monetary policy, changes in tax regimes and a potential walk-back in regulation.  We have already seen sector rotations within equity markets and greater dispersion/reduced correlations across securities.  I expect these to continue in 2017 and this should provide a good trading environment for managers both on the long and short side.  Hedge funds in general carry little to no duration so can continue to do well even in a rising rate environment.  Investors have been disappointed by overall hedge fund performance in the last few years; 2017 should be a year in which the flexibility, trading orientation and long and short capabilities of hedge funds start to pay off again.

What is your outlook for the economy?

This is a tough one. I believe sentiment will play a large role particularly in how the U.S. economy does (Keynes' proverbial "animal spirits").  If consumers continue to feel confident (e.g., December 2016's consumer sentiment reading of 98.2 vs. November's 93.8 -  as of January 11, 2017), they will continue to spend and that creates a solid base for 2017.  Confusion and/or worries over international trade, the impact of tax changes and geopolitical risks can quickly result in a turn in consumer sentiment and a strong pull-back from spending.  On the corporate front, markets have certainly been positive on expectations of change given the new administration and Congress; it remains to be seen what the real impact on growth and earnings will be. 

What keeps you up at night?

Given that I live in California near the ocean and several fault lines, there are lots of things to worry about!  More pertinent to this discussion, however, I worry about the current underfunded status of public pension plans and the resulting threat to future pensioners.  Investing more and more into long-only equity and traditional fixed-income is not going to solve these problems and will likely exacerbate them.  Away from defined benefit programs, the lack of substantial personal savings and low defined contribution plan levels combined with uncertainty over Social Security could leave many of the future elderly in a precarious position economically.