Rising rates could bring good times for stock-pickers

By: | Published: August 7, 2015 9:59 PM

Think the imminent rise in U.S. interest rates is universally bad news for markets? - Think again.

US dollar US stock-pickers and hedge funds may indeed profit from an expected rate rise that has already brought added volatility and ‘dispersion’, an industry measure of variances in performances in stocks and asset classes. (Reuters)

Think the imminent rise in U.S. interest rates is universally bad news for markets? – Think again.

Equity markets have broadly been on an upwards path since the 2008 global financial crisis, as record low interest rates and injections of cash from central banks pushed markets in New York, London and Frankfurt to record highs.

This has allowed passive funds – those that simply track the underlying market – to have generated better returns in that period than more active investment funds that trade in and out of positions more frequently.
However, that pattern may be ending.

If history is any guide, stock-pickers and hedge funds may indeed profit from an expected rate rise that has already brought added volatility and ‘dispersion’, an industry measure of variances in performances in stocks and asset classes.

Dispersion in July rose above 7 percent on the U.S. S&P 500  last month for the first time since early 2012, while BlackRock – the world’s largest asset manager – reported last month that its institutional active strategies had seen net inflows of $2.5 billion.

Thomson Reuters’ Lipper data also showed passively managed equity funds underperforming actively managed ones in a one-year period through to end-April 2015.

“Historically, value-oriented active strategies have performed better relative to S&P Dow Jones Indices during periods of market volatility,” said Todd Rosenbluth, a senior director at S&P Capital IQ.

While July was a mixed month for stock-picking hedge funds, these funds are showing stronger returns year-to-date than global macro funds that bet on currencies and interest rates.

Mark Kingdon’s Kingdon Capital, for example, is up more than 15 percent, while William Ackman’s Pershing Square Capital Management, helped by gains in Herbalife, is up 10 percent.

DIFFERENT MONETARY POLICIES

Iwan Deplazes, head of asset management at Switzerland’s Zürcher Kantonalbank, also expected “actively-managed” products at its Swisscanto arm to outperform for the rest of 2015.

U.S. Federal Reserve and Bank of England officials have signalled potential rate rises soon, while the European Central Bank (ECB) is seen keeping rates at a record low since the euro zone remains beset by Greece’s debt problems.

Former Bank of England official and GAM Star Keynes fund manager Sushil Wadhwani said volatility caused by this would boost certain specialist hedge funds such as those known as CTAs (commodity trading advisors) which trade on the futures market.

“CTAs are entering an environment which is more conducive to their outperforming, having struggled to keep up with traditional portfolios during the early stages of the recovery following the financial crisis,” said Wadhwani.

The Fed last raised rates in June 2006, while the Bank of England last increased them in July 2007.

The Eurekahedge Hedge Fund Index rose in the second half of June 2006, following the Fed’s hike. It also rose in the third quarter of 2007, after the Bank of England’s hike, although it then dropped back towards the end of that year.

Sam Diedrich, director at investment firm PAAMCO, cautioned that while the sort of funds that could do well in a volatile market environment were not for the faint-hearted, they may reap healthy rewards.

“Volatility in markets will increase the risks, but also the return potential for such strategies”, he said.

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