© Reuters. Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, November 21, 2022. REUTERS/Brendan McDiarmid
Written by Neil McKenzie, Carolina Mandel, and Samer Zain
LONDON/NEW YORK/HONG KONG (Reuters) – For hedge funds, the second half of 2023 is about pouncing on the ways inflation, sharply higher interest rates and decarbonization are shaping the economy.
Major central banks have collectively raised interest rates by more than 3,750 basis points since September 2021, and while the pace has eased, the global economy has yet to feel the full impact.
Four prominent funds shared their thoughts on using four different asset classes to trade in this uncertainty.
The ideas do not represent recommendations or trading positions that hedge funds cannot disclose for regulatory reasons.
1/ UPS O’Connor
* Alternatives platform, with both hedge and credit funds
* Size: $9.5 billion
* Founded in 2000
Principal Trade: So-called “defaulted” convertible notes, or hybrid securities where shares are trading below the option’s conversion price.
Casey Talbot, chief investment officer at UBS O’Connor Multi-Strategy Alpha, suggested investing in convertible bond trading at a discount.
Companies took advantage of relatively easier financing terms between 2020 and early 2022 to raise money by issuing a certain type of bond that can be converted into shares.
At the time, these companies issued high stock valuations, low coupon bonds, and low or no coupon convertible bonds.
“With prices moving and stocks correcting, these convertibles are now trading at rock-bottom dollar rates,” Talbot said.
They may offer investors a good return if the issuing company engages in M&A activity or if it decides to buy back the bond to take advantage of the lower price of the debt.
2 / industrial capital partners
* An Asia-focused investment firm specializing in equity strategies
* Size: $3.5 billion
* Founded in 2000
* Major deals: Japanese companies long benefit from B2B inflation and improving real wages
Byron Gill, managing partner and portfolio manager at Indus Capital Partners, sees opportunities in Japanese companies benefiting from business-to-business (B2B) inflation, in which one company passes rising costs on to another.
Its hedge fund has added long-term exposure to the industrials and materials sectors, to companies equipped to deal with rising costs and raise their prices even further while initiating long-overdue changes to pricing practices.
Howard Smith, portfolio manager for Indus, said it was focused on identifying beneficiaries of the real wage improvement such as local retailers and restaurants.
The latest data showed that real wages in Japan declined for the 13th consecutive month in April.
3/ the capital of Merli
* A multi-strategy hedge fund
* Size: 300 million euros ($327.96 million).
* Founded in 2022
* Main trade: buying gold
Merli Capital founder Anastasia Tarasova said dollar weakness and volatility around Fed interest rate expectations make it a good time to look at precious metals.
She added that central banks have recently replenished gold reserves at historical levels.
Tarasova said gold could reach $1,950 to $2,000 an ounce by the end of 2023, which would mean a gain of more than 5.5% from the current price of $1,895.
If expectations worsen and gold rises through $2070, Tarasova could see a further rally to $2090-2100.
“The geopolitical consequences of the conflict in Ukraine are still not clear, so demand for gold as a hedge asset remains relevant,” she added.
4 / Reserve asset management
* Redhedge Synergy Total Return is a credit hedge fund within an asset manager
* Size: 380 million US dollars
* Founded in 2014
* Main trade: long investment grade bonds and short high yield bonds
Andrea Seminara, founder and chief information officer of Redhedge Asset Management, believes that bond markets underestimate how big of a player the ECB remains.
“People underestimate the proportion of new bonds they buy,” Seminara said.
The European Central Bank is reducing its bond holdings but remains a large holder of Eurozone bonds.
Seminara added that the huge rise in stocks driven by the AI boom contributed to narrowing the spread between bonds with similar maturities but with different credit ratings.
She added that if a recession hits the price of high-yield bonds, it will widen the difference between high-investment-rated bonds and riskier peers.
Seminara favored long positions in investment grade bonds and shorting high-yield bonds across the iTraxx Europe and iTraxx Crossover indices.
($1 = 0.9147 euros)