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Asset Allocator

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Long/short funds dig in for the long haul; Hedging questions loom larger for UK portfolios

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The long game

Stock markets may have displayed admirable resilience in 2020, but the typical short seller wouldn’t have felt too hard done by. Shorts that worked at the start of the year continued to do so for most of the months that followed. Indeed, many found themselves simply “in the right place at the right time”.

Then came November, and a reassessment in some quarters. There’s little evidence that long/short strategies have rushed to change things, however: our latest analysis of DFMs’ favourite picks in the space shows most funds took a pretty prudent approach.

As the chart below shows, only one fund saw their overall net exposure change by more than 10 percentage points in the final three months of 2020.

Admittedly, the chart doesn’t show how sector bets have changed. But the overall preference for incremental adjustments is clear, at least on a net basis. Gross exposures tell a slightly different story this time: rising figures here indicate managers are increasingly inclined to embrace risk.

As that implies, long books remain the main area of interest, and there’s reason to think that will continue. With value plays showing signs of recovery, there’s no little consensus over which sectors are going to struggle in the coming months.

What’s more, in a market where many different stocks are shooting higher, contrarian bets can often find themselves wiped out. Last Friday saw another example of a short-seller falling victim to animal spirits – more on that below -  but as it stands, most professional long/short managers remain content to see indices grind higher.

Splendid isolation

The reopening trade has taken a hit today on the news of the UK’s ‘quarantine hotels’ for overseas arrivals and other restrictions in Europe. The question of how long such measures are actually in place is perhaps beside the point: investors are struggling to factor in a return to normal at a time when countervailing measures are still being introduced.

Some allocators are more forward-looking, of course. And even those involved in currency markets – not always known for their long-term approach – are showing signs of taking a longer-term view. Sterling has strengthened against the euro this month, reaching an eight-month high last week.

That’s been helped by the varying state of vaccine rollouts across Europe. While the UK is forging ahead in spite of some looming supply concerns, the EU is yet to really get going, and seemingly faces even greater supply issues of its own.

Part of the EU delay is down to regulators taking time to verify the AstraZeneca vaccine. But investors are focusing on outcomes rather than procedures, and their impression is that the UK’s rollout raises the prospect of an earlier end to economic restrictions.

That has implications from a portfolio perspective, too. Given its enduring weakness, wealth managers have sought to hedge against the risk of rising sterling on more than one occasion in recent years. More often than not, those moves have ultimately proven premature. But as Europe grapples with vaccinations, and the dollar comes under its own pressures, now may prove a better time for those hedges – even as the UK continues to deal with its myriad border-related issues.

Short shrift

The growing power of US retail investors was underlined again on Friday via a share surge for US video games retailer GameStop. That was courtesy of Reddit’s army of retail traders amassing to defend the company from short seller Citron Research, which announced it was betting against the company.

The move proved remarkably effective in the short term, sending the retailer's shares almost 80 per cent higher on the day – though countermeasures went beyond just buying the stock, as the FT notes.

In any case, this is another sign of the retail trading boom in full effect. Developments are less dramatic on these shores, but results posted by AJ Bell last week show that a similar jump in investing interest is underway in the UK, too. The US market is still coming to terms with the impact of these changes; for professional investors, the more pertinent question may be whether this DIY trend can ultimately be converted into an advised one.

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