Trends Watch: Private Equity and Hedge Funds

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 Dennison (Dan) T. Veru, Co-Chairman & Chief Investment Officer, Palisade Capital Management.

What is your outlook for alternatives?

1. Private Equity: Given the recent drop in interest rates, private equity returns should continue to perform. Equity valuations are elevated but not unreasonable and demand for high yield remains strong allowing for PE sponsors to use leverage to generate returns.
2. Hedge Funds: Funds that can take advantage of increased volatility in equities should perform well as stock pickers are being rewarded for tactical decisions. Volatility is likely to be remain elevated for the foreseeable future. 

What is your outlook for the economy?

The underpinnings of the economy remain favorable; however, confidence has taken a beating recently due to the prolonged nature of the trade dispute between the U.S. and China. For the economic expansion to remain in place, capital investment by companies must remain robust. Long-term investments will only be made if corporate CEOs are confident in the future and a trade war can undermine that confidence and trigger an economic slowdown. The corporate earnings season has just begun and so far, numbers are fine -- but it is early.   

What keeps you up at night?

Being a light sleeper, everything keeps me awake at night, but I worry that trade disputes can become trade wars which can simply become wars. If progress is made by Chinese and U.S. leaders and a deal can be reached this year, earnings growth can remain solid leading to higher stock prices over time. Interest rates could move up a bit but not enough to slow growth or make stocks less appealing. If a deal is not reached and trade tensions ratchet higher, it is likely that we will have slowing economic growth in the U.S. and around the world which will slow corporate profits. I don’t know if that will be enough to trigger a recession because favorable U.S. tax policy and rising wages from a full employment economy can offset some of these negative macro forces. Right now, I see a slowdown as more of a profits recession rather than something more serious.  At the end of the day, rising trade tensions are hurting China more than the U.S., but it will be interesting to see who blinks first.