Increased Market Volatility Creates Opportunities in Alternative Strategies
Conshohocken, PA, March 16, 2021 - The last few weeks have seen increased volatility in the equity markets as rates have begun to creep back up surrounding inflation fears and investors temporarily pulling out of big tech names that have driven the S&P’s performance for the past few years. As more and more people are vaccinated, the probability of a recession has dipped towards pre-Covid levels (see chart), all while the Federal Reserve is being incentivized to keep treasury yields as low as possible, even with more stimulus hitting the system.
Despite the recent increase in the 10-Year T-bill moving from 0.93% at the end of the year to over 1.6%, we believe rates (while higher) are still likely to remain significantly below their historic averages for the foreseeable future. The Fed has maintained that they will allow inflation in-excess of 2% but given the continued weakness across many areas of the economy, it is difficult to see inflation approaching that level in the near term. Consequently, yield starved investors continue to look to the private markets to satisfy their income needs.
The recent volatility also reminds us that valuations do matter, and active investing and stock picking are rewarded. With that in mind, we believe hedge funds are very interesting again and we are starting to hear more wealth advisors looking to allocate to hedge fund strategies.
“We remain very bullish on the hedge fund strategy of reinsurance – a non-correlated return stream to both stocks and bonds."
We expect volatility to continue now that the next round of stimulus is now here and has been fully priced into market valuations. As such, allocating to uncorrelated return strategies remains in focus for many. We remain very bullish on the hedge fund strategy of reinsurance – a non-correlated return stream to both stocks and bonds.