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Trends Watch: September 13, 2018

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 Amir Shaked, Managing Member, Shaked Capital Advisors, LLC.

What is your outlook for the economy and markets?

Rising inflation and tightening labor markets will force the Fed to continue to raise interest rates, and President Trump’s legislative and especially tax reform will increase the national debt and indirectly also raise rates.   Rising rates will permeate all sectors of the economy and reflect in net profits. Some highly rate-sensitive and leveraged sectors, like financials and real estate, will be particularly impacted.   The economy is clearly in late cycle phase, evident by volumes, pricing, margins and, most importantly, return on and cost of capital.

Valuations will undergo an extended adjustment period, resulting in a prolonged sideways moving equity market with lots of volatility. Anyone waiting for a market melt-down is not going to get it because interest rates are absolutely and relatively low, so equities still have limited downside. Anyone waiting for a market melt-up is not going to get it because valuations are absolutely and relatively high, so equities have limited upside.

What is your outlook for alternatives?

We focus on long/short funds invested in all the key liquid asset classes, including debt, equity, commodities, currencies and derivatives, in global markets. We consider the macro and the micro together with the qualitative and the quantitative. We disproportionately allocate to the path of least resistance for optimal Sharpe ratio (return relative to volatility) and beta (correlated relative volatility).

We are currently invested in primarily event-driven strategies, rather than fundamental, relative value, arbitrage and statistical, because we think the latter are too challenging in this tumultuous environment. Currently, our book is much more short than it has ever been, reflecting an elevated and likely sustained attractive opportunity set.

The majority of the book is equity, where upside and downside is balanced, creating opportunity both long and short. We have some exposure to debt, where downside exceeds upside and opportunity is primarily short, especially in very rate-sensitive and leveraged high yield and commercial mortgage backed securities. We are not invested in commodities and currencies and have little exposure to derivatives, where markets are currently trendless and too confusing.

We are currently focused on developed domestic and foreign (primarily Western European) markets because developing/emerging markets are very chaotic.  

Most investors are going to have a really hard time adjusting to this environment, and for us these are perfect conditions to make money long and short.

What keeps you up at night?

The only thing that consistently keeps us awake at night is that President Trump is not a low volatility index personality. He is very unpredictable and it is always unclear what he is going to do tomorrow. This will continue to be reflected in the economy and markets. Still, our appropriately positioned exposure helps us sleep.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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