EisnerAmper Trends Watch: Active Management
April 29, 2021
By Elana Margulies-Snyderman
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 Jim Neumann, CIO, Sussex Partners.
What is your outlook for alternative investments?
Alternative investments, and hedge funds in particular, are enjoying a period of solid performance. The performance took a bit of hit as the ‘black swan” of the global pandemic hit all markets in March 2020, but they have performed according to design since then. The alternatives’ decision tree centers around active versus passive management. Hedge funds fall into the higher-cost active management category, where, at least in theory, the most capable fund managers reside. As the recovery from the global shock comes at disparate speeds and with very specific asset pricing ramifications across economies, positioning at least a portion of risk assets in active management seems wise. The ability to navigate the current environment in long/short fashion places hedge funds at an advantage over the long-only active managers and certainly the passive fund/ETF universe. There is a broad spectrum of offerings from liquid alternatives to P/E style funds across strategies. It is this selection of fund type, strategy, and ultimately the manager which require the resources to perform a deep due diligence dive to help ensure any mandate’s objective is met.
Where do you see the greatest opportunities and why?
An assessment of opportunity should be preceded by an educated, probability-weighted view of the current global investment landscape. This is currently a rather difficult task given all the global cross-currents as the world tries to emerge from the pandemic. Despite some positive economic readings, especially from the U.S., it seems that the flood of government intervention purposed liquidity has led to valuations and market behavior that are disconnected from fundamentals. Even in March 2020, the dislocation was met with a wall of liquidity, including from hedge funds with longer-locked capital. This results in the best opportunity being one of layering on prudent, uncorrelated strategies rather than assuming directional (read beta) risk in assets or strategies that are arguably at stretched valuations. This does not mean that an investor cannot have these long-biased equity strategies, but that some non-correlated strategies should sit alongside. Favored here are strategies like global macro, advanced trend following, short-term trading, relative value volatility (including convertible arbitrage), and other uncorrelated, preferably convex exposures. Some exposure to commodities has been desirable and time should be spent on Asia, particularly Japan and China.
What are the greatest challenges you face and why?
Periods of transition, including the unprecedented current one, necessarily come with greater investment uncertainty. Allocators are faced with the dilemma of having to produce an acceptable return when many asset classes are being priced to perfection despite the global shock. The enormous size of the global liquidity response is the only explanatory bridge between value and current pricing and it begs the question of persistence. In January of 2020, the market was preparing for a modest recession, perhaps accompanied by an opportunity-laden distressed cycle, but by April it was off to the races for extremely forward looking valuations. The real challenge here for investors is to stay prudent and not chase returns. While getting investors’ attention about adding some uncorrelated exposures to their portfolios is easy, getting the investors to fund, particularly as the “shiny things,” like growth equities, Bitcoin, SPACs, etc, twinkle, is more of a challenge.
What keeps you up at night?
The bad dream scenario is that one day the investing world wakes up and decides across assets that the proverbial emperor has no clothes. The growth stocks which had been the drivers of equity long/short returns return to earth, corporates’ outlooks matter to credit spreads, and pockets of excess like private lending are exposed. This is by no means a wish or a prediction, again being very respectful of the power of government intervention, but merely needs to be in a range of outcomes conversation. The further concern is that even those assets and strategies which have been protective in dislocated periods have lost that characteristic. For example, as even very astute investors begin to move some percentage of assets into bitcoin on the basis of adoption vs. finite supply, investors might not be as keen to hold gold as a protection asset. Only time will determine how this plays out. The old Keynes’ adage about markets remaining irrational longer than an investor can remain solvent may be at play. This is also precisely the rationale for adding a “sleep-aid” like uncorrelated strategies to one’s portfolio while the emperor is exquisitely attired.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.