Preview
The US Federal Reserve (Fed) has affirmed to the market that interest-rate cuts are in the cards for the near future. For now, it appears that inflationary pressures are in the rearview mirror of central banks, with economic growth and financial stability on the dashboard. However, we think there is the potential for increased dispersion and volatility during the months ahead, which we believe will, in turn, provide opportunities for active investment management, of which hedge funds are the ultimate expression.
Strategy highlights
- Discretionary global macro: Markets continue to focus on central bank policy, changes in political leadership, and geopolitical tensions, all of which can play in favor of discretionary macro managers.
- Insurance-linked securities (ILS): Despite recent tightening, the sector remains well-supported and poised for continued growth, in our view, particularly with the primary issuance slated through year end that is expected to help restart activity in the secondary market.
- Long/short credit: We see potential to benefit from an increase in dispersion across single issuers given still-elevated base rates, tight spreads, and prevalence of political, economic and technical risks impacting both public and private credit markets.
|
Strategy |
Outlook |
|---|---|
| Long/Short Equity | Neutral but improving given higher sustained levels of dispersion. Fundamentals are driving price action, and high gross exposures reflect managers’ confidence in their portfolios. Artificial intelligence (AI) represents a massive product cycle to create winners and losers. |
| Relative Value | An upgrade for the strategy from underweight to neutral, prompted by modest improvements in each of the sub-strategies due to potential for higher volatility across asset classes, increased dispersion in central bank policies, and a busier new-issue calendar. |
| Event Driven | Maintain neutral outlook with minimal improvement at the sub-strategy level. Environment for activism and special situations investing remains favorable due to easing monetary policy. Merger arbitrage continues to face deal-specific regulatory risks, favoring active deal selection and trading due to high dispersion of outcomes. |
| Credit | Modest improvement at the sub-strategy level, though the strategy remains an underweight given generally tight spreads and excess of capital across public and private credit markets. Long/short credit is one area of improvement this quarter given its potential to benefit from an increase in volatility or dispersion at the issuer level. |
| Global Macro | Macro strategies should continue to benefit from an environment dominated by central bank policy, changes in political leadership, and geopolitical tensions. The potential for regime shifts may favor shorter-term strategies, though longer-term trends and themes may develop in the coming months. |
| Commodities | Commodity strategies may continue to face headwinds if macro factors like China’s growth and US politics continue to dominate market moves. Managers may focus on relative value and tactical trading opportunities while directional moves may be swayed by factors outside of typical supply and demand. |
| Insurance-Linked Securities (ILS) | The sector remains well-supported and is positioned for continued growth. We continue to maintain our overweight outlook, anticipating that activity will return both in the primary and secondary markets in the coming months. |
DISCLOSURE
The K2 Investment Management (IM) Outlook Scores are the opinions of the K2 IM group as of the date indicated and may not reflect the views of other groups within K2 or Franklin Templeton. Scores are determined relative to other hedge fund strategies and do not represent an opinion regarding absolute expected future performance or risk of any strategy or sub-strategy. Scores are determined by the K2 IM group based on a variety of factors deemed relevant to the analyst(s) covering the strategy or sub-strategy and may change from time to time in K2's sole discretion.
These scores are only one of several factors that K2 uses in making investment recommendations, which may vary based on a client's specific investment objectives, risk tolerance and other considerations. Therefore, a positive or negative score may not indicate that a particular strategy or sub-strategy should be overweighted or underweighted, respectively, in any given portfolio.
This information contains a general discussion of certain strategies pursued by underlying hedge strategies, which may be allocated across several K2 strategies. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of the funds employing K2 strategies. Nothing in this document should be construed as investment advice. Specific performance information relating to K2 strategies is available from K2. This presentation should not be reproduced without the written consent of K2.
Past performance is not an indicator or guarantee of future results.
Certain information contained in this document represents or is based upon forward-looking statements or information, including descriptions of anticipated market changes and expectations of future activity. K2 believes that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements and information are inherently uncertain and actual events or results may differ from those projected. Therefore, too much reliance should not be placed on such forward-looking statements and information.
Professional care and diligence have been exercised in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton/K2 has not independently verified, validated or audited such data.
Any research and analysis contained in this document has been procured by Franklin Templeton/K2 Investments for its own purposes and is provided to you only incidentally. Franklin Templeton/K2 shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error
or omission.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. Some subadvisors may have little or no experience managing the assets of a registered investment company. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Currency management strategies could result in losses to the fund if currencies do not perform as expected.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments. Short selling is a speculative strategy. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short. Investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. Liquidity risk exists when securities or other investments become more difficult to sell, or are unable to be sold, at the price at which they have been valued.
Active management does not ensure gains or protect against market declines.