Hedge funds: bear with us
The pessimistic view that hefty new debts will slow recovery is being outweighed for now by animal spirits and cheap money
Investors pay up to find the “smart money”. That is the justification for the steep charges of hedge funds. The crash and rally in equities this year has given them the chance to prove their worth. Pessimists among them, including Elliott Management and Fasanara Capital, expect to do so by doubting recent price rises. Their scepticism is well founded.
US stock markets, which set the tone for the world’s bourses, have detached from economic realities. The S&P 500 index is less than a tenth from its all-time peak. Yet the consensus forecast is for GDP to drop by more than half year on year in the second quarter. The economy cannot rebound quickly after that, thinks Elliott’s Paul Singer.
The veteran investor expects a depression that exceeds the last global financial crisis. His fund has performed well enough in the first quarter this year — up 2 per cent versus an average drop of over 9 per cent — for his words to carry weight.
What will happen when government stimulus stops? Fearing this reality shock, funds such as Fasanara Capital hold 70 per cent of their assets in cash. Other hedgies, such as Crispin Odey, worry that high inflation will follow the stimulus.
Earnings-based valuations are already pricing in a full recovery. Germany’s Dax index trades at a forward price to earnings multiple of about 18 times — 40 per cent more than the average this millennium.
Every week of rising prices brings humiliation for pessimists — including Lex. We think the hefty new debts of governments and corporations will slow down recovery. Animal spirits and cheap money are outweighing that view for the moment.
That helps a majority of hedge funds, who, despite their name are positively correlated to markets. Meanwhile, Sandbar’s Global Equity Market Neutral fund has delivered positive — and uncorrelated — returns throughout this year. As of this week, it has risen 11 per cent. These are the sort of smarts investors long to own — rather than the chance to lose money for logical reasons.