Our K2 Advisors team is optimistic about the opportunity set in the year ahead, and thinks that active management alpha will be key to success in 2021. Brooks Ritchey and Robert Christian provide the team’s first-quarter hedge-fund strategy outlook.

Strategy Highlights

Long/Short Equity
Long/short equity managers have been resilient on a year-to-date basis. While stocks are trading at high valuations, we believe there are still asymmetric dispersion opportunities that could lead to incremental alpha generation in particular areas of the market.

Relative Value
Favorable outlook for volatility arbitrage and convertible arbitrage strategies driven by persistent inefficiencies in pricing among various asset classes. Negative outlook for fixed income arbitrage based on depressed volatility due to excess central bank liquidity.

Event Driven

Neutral outlook for merger arbitrage, as spreads for “safe” deals have been tightening. Attractive opportunity set remains in the more complex merger situations as well as special situations equity and credit investing where manager experience is more likely to produce superior outcomes.

Credit

Long/short credit managers are increasingly focused on event-driven situations given low yields and tight spreads. Uncertainty in structured credit may lead to high levels of dispersion at the instrument, market and manager level.

Global Macro

As the macro shocks of the last year appear to be normalizing, fundamental dispersion between regions, countries and asset classes may become an increasingly important driver of returns. Managers focused on this dispersion, particularly within emerging markets, may benefit from a rich opportunity set in the year ahead.

Commodities

The global economic recovery is supportive of increased commodity demand across sub-strategies. As supply-demand tightens into 2021, volatility is expected to increase and favor relative value strategies.

Insurance-Linked Securities

Both insurance and reinsurance pricing trends are positive as higher-than-average natural catastrophe insured losses, broader industry COVID-19-related losses and low interest rates result in higher pricing across the sector including ILS strategies.