Trends Watch: November 10, 2016
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 Boris Stavrev CFA at Concise Capital Management.
What is your outlook for the alternative investment industry going forward?
We have seen institutional investors such as pensions, endowments and foundations redirect cash from alternatives to index ETFs and mutual funds. For example, through September 2016, hedge funds have seen outflows of $50 billion. Among the reasons are underperformance, high fees and the high cost of monitoring the investment strategy on the part of the investor. In my opinion, alternatives have underperformed compared to index products because of the market being dominated by the Fed, where riding on the way up with the smallest fees possible has become the most important determinant of short-term performance. However, judging by the massive inflows, indexed products have become an overcrowded trade. In a market selloff, similar to the beginning of this year, we are likely to see everyone heading for the exits, resulting in massive outflows and underperformance for indexed products compared to alternatives. That scenario would give alternatives a new lease of life with investors once again looking for downside protection, low correlation and ways to make money in a sideways market.
What is your outlook for the economy?
Slow growth is to continue for some time into the future, but the lack of meaningful inflation and wage growth makes it apparent that the economy hasn’t healed fully after the 2008 crisis. To a great extent, this is due to the lack of meaningful reforms in key sectors, such as education, health care, taxation and immigration. The biggest problem, not just in the United States, but in other developed economies, is that the job skills, knowledge and training required do not match that of the current workforce. The current education and immigration systems do not allow for workers with the right skills to be either grown domestically or to immigrate in meaningful numbers. The result is near-zero long-term growth in the U.S., Europe and Japan, and a wave of far-right, far-left populism in each of these countries. In the U.S., the unemployment rate of 5% is well below full employment, meaning the bubble is bigger than people might think, due to the wrong notion that structural and seasonal unemployment equal 5%. In my opinion, structural unemployment is much higher than initially thought, and the Fed should have started tightening monetary policy sooner. I believe now we are on the verge of a meaningful downturn that may last a while before the economy returns to its slow growth state.
What keeps you up at night?
The Chinese economy is exhibiting signs of a bubble ready to burst -- high debt levels and real estate being the only performing sector. That would definitely pull other large economies down and expose their weaknesses. Far-right and far-left populists, who promise people a return to “the good old days,” pose significant long-term economic and political risks for both developed and developing countries.