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Asset Allocator

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Hedgies ride out the rotation as old favourites struggle; An unloved sector moves up the agenda

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A welcome alternative

The last few months have contained plenty of events to remember for long/short managers. The headlines this quarter were initially stolen by GameStop and US retail investors’ bid to derail hedge funds’ short theses. But the bigger challenge has been dealing with the ongoing market rotation: as unloved sectors rally and consensus favourites become more volatile, both long and short baskets have been affected.

That's the theory, at least. In practice, equity long/short Ucits funds have weathered things rather well. The majority of those we track are flat or slightly in the black year to date; the worst of the group have lost just 3 per cent, and volatility in all cases has been muted. One portfolio, Majedie Tortoise, has returned 18 per cent, ranking it among the very best in the UK funds universe so far in 2021.

Of course, this cohort is a relatively small group, and there are examples of DFM long/short picks that have struggled to keep up. The Lyxor/Sandler US Equity fund, for instance, is down 6 per cent year to date.

On the whole, however, DFMs’ alternative favourites will be content with their lot. Even trend-following strategies like Aspect Diversified Trends have posted positive returns so far this year – no doubt because undervalued shares increasingly resemble momentum plays themselves.

To find the real stragglers of the alternatives world, wealth managers should look to their former multi-asset absolute return fund favourites. Strategies run by Aviva Investors, Invesco and Standard Life Aberdeen had a better time of it for much of 2020, but each has shed 6 per cent in 2021. For all the equity market rotation, it’s the volatility in other asset classes – bonds chief among them – that’s likely had the biggest impact on alternatives offerings this year.

On the rise

On bonds specifically, the continued back-up in yields is making some parts of the market look more attractive. That’s according to Axa IM fixed income head Chris Iggo, who notes that long-dated US investment grade credit now yields more than 3 per cent – at a time when European credit yields just 1 per cent, and hedging costs are still relatively cheap.

For those able to take on more risk, there’s another asset class rising up the agenda. There's plenty of grisly country-specific news out there, but dollar-denominated EMD yields are also on the rise – and, as Iggo notes, one index of such bonds now yields 5.2 per cent.

As ever, when it comes to EMD decisions, there are competing factors at play. At the start of the year, very few fund firms were positive on the asset class. That was despite widespread expectations of dollar weakness, typically a boon for emerging market bonds.

A couple of months later, the dollar is confounding doubters again, and the prospect of higher US inflation and higher US rates is back on investors’ agenda. That would seemingly spell bigger problems for EMD. On the other hand, a booming US and a global recovery could help out emerging markets, particularly those that are commodity-focused.

Untangling these threads from one another is a difficult task, and it's hard to envisage a prolonged period in which EMD rallies but other parts of the bond universe continue to struggle. All the same, if yields continue to rise allocators might start looking a little more closely.

Boom or bust

Another datapoint confirming that January saw a surge in stock market interest from new and/or younger investors: Interactive Investor saw a 370 per cent increase in new accounts in the final two weeks of the month. Demand from 18-25 year olds rose by 1,200 per cent.

That last figure is undoubtedly starting from a low base. But it is the start of something. The FT last week discussed the likelihood – or otherwise – of such trends persisting, highlighting how the likes of the dotcom crash curtailed interest last time around.

Something similar could yet happen again. A devil’s advocate argument says this time is different: savers have proportionally larger cash piles, and the cryptocurrency mania has already made this group aware that losses can be fast and deep.

There's no telling how accurate those assumptions will be until a drawdown does arrive. In the meantime, companies are making hay: Interactive Investor is itself eyeing a flotation later this year.    

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