Holy Moly, what a start to the year.
As first days in new jobs go, Jay Powell’s will long take some beating – with his assumption of the chair at the Fed on 5 February coinciding with a savage reversal in global equity markets from their earlier ‘melt-up’ mode in January, amid a dramatic surge in volatility and some sharp falls.
The long-anticipated return of volatility was violent when it came – possibly as a result of vol having been suppressed at such historically, and many would say artificially, low levels for quite such a long period of time. And the fact that so many people had been expecting a vol spike for so long did not mean that they were ready for it when it happened.
Many funds – mainly in systematic and trend-following strategies, but in other areas too – gave back their previous hefty gains from January in a matter of days (or even hours, in some cases) and more besides. Equity managers moved quickly to cut net and gross exposures, although many believe that this is becoming an increasing attractive and opportunity-rich market and remain heavily invested.
Vol sellers and short-vol funds took huge hits, as always seems to happen eventually with such strategies. And the VIX ‘fear index’ found its way back onto the front pages of the mainstream press, several years since it had last been a topic of public attention and alarm.
Where things go from here is anyone’s guess – and anyone who says they know is probably either a fool or a liar. But the prospect of a ‘re-normalising’ of monetary policy in the major economies – with rates rising in a bid to dampen inflationary pressures – will clearly continue to spook markets that have become so completely addicted to ultra-low rates and easy money over almost a decade now.
Furthermore, the stage is set for some tense battles between central banks and governments – in the US, the UK, Europe and elsewhere. Rising rates and falling asset prices do not make for popular politics on the whole – and no government wants a crash on its watch (least of all ‘The Donald’, who sees a rising American stock market as an appropriate reflection of his own brilliance).
But one thing is clear: this should be the acid test for hedge funds, and for active managers generally. Many people are already talking about the return of macro – and some of the most experienced, and proven, macro managers are lining up to capitalise on a fast-changing market environment and opportunity set (whether it is Brevan Howard rolling out a new volatility fund, or ex-GLG and Moore star trader Greg Coffey making his long-awaited comeback with Kirkoswald).
Stock-pickers are licking their lips again, on the long and short sides. And more unsettled and volatile markets, with less correlation and more dispersion, should – in theory at least – be much better for all kinds of hedge fund managers and strategies, whether in relative value and arbitrage, event-driven, credit, fundamental or quant.
This may have been a blip in a continuing bull market. It may be the start of a bear market. But the events of the first few weeks of this year have served as a sharp reminder that the flipside of risk asset markets’ ability to produce wealth is their capacity to deliver pain – and that markets are usually at their most dangerous after those periods when they have been calmest for the longest time.
Investors have had a wake-up call and the risks of passive investment are now clear for all to see. After all, it is scant consolation to know that it only cost you a few basis points to own a Vanguard index fund or a leveraged ETF when you might be facing a significant capital loss.
There will be winners and losers in the alternative investment space too. It could hardly be otherwise. But this is the opportunity to prove the doubters wrong, and to show that active managers – and hedge funds in particular – do, at the end of the day and over the cycle, add value.
• After a lot of fun, interest and enjoyment over almost 14 years editing EuroHedge, as of next month I am handing over this space to Will Wainewright – who has recently rejoined Pageant Media as head of content for EuroHedge.
Will has extensive experience covering the European and global hedge fund industry and will be well-known to many of you from his time as news editor for HFM Week in London and New York, and subsequently as European hedge funds reporter at Bloomberg.
While Will takes over the day-to-day role as editor, I will be moving into a new position as editor at large – still regularly contributing to EuroHedge and remaining closely involved with our Awards, the EuroHedge Summit and our other publishing, data and event activities whilst also taking on additional roles within the broader Pageant/HFM business.