Macroeconomic trends around volatility and inflation will create opportunities for hedge funds to deliver alpha next year, according to sector leaders.

Macro and trend-following strategies were amongst the best-performing for hedge funds this year amid soaring volatility across equities, FX, and bond markets.

Through October, global macro hedge funds gained 18.4%, according to hedge fund research firm HFR.

An index designed by Societe Generale that tracks the performance of the largest trend-following commodity trading adviser funds — hedge funds that use managed futures strategies — climbed by 36% through September.

As central banks across the world fight to bring inflation down in 2023, hedge funds are expecting volatility to keep rising, paving way for macro and trend-following managers to score big again next year.

“The trend of higher volatility across markets, and macroeconomic trends being the dominant driver of investment returns is going to continue. You need to stay nimble in this environment,” Man Group deputy chief executive Mark Jones told Financial News.

“Macro hedge funds were one of the few bright spots for investors this year. Investors need to focus on strategies that can actively manage exposures to help them navigate 2023,” he added.

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David Neuhauser, founder and chief investment officer of event-driven hedge fund Livermore Partners, said that increased volatility is the “new norm” amid rising interest rates.

After a dismal performance in the first three quarters of 2022, global equity markets saw a rebound in October and November. But Patrick Ghali, managing partner of hedge fund advisor Sussex Partners, said that an upcoming earnings recession has not been fully priced in yet.

“With continued volatility, macro and trend followers should still face a rich trading environment next year. However, the risk to that outlook is if markets revert to being range bound and choppy. So, a portfolio approach which includes some short-term hold managers is favoured,” Ghali told FN.

Global economic growth is likely to stay weak next year, with Europe and the UK expected to contract, according to Morgan Stanley. For macro and trend-following hedge funds, opportunities across FX, equity, bond, and commodity markets will be a driving force in 2023.

“It does seem unlikely that the central banks will be able to get to their targets within the prescribed timeline, at least not without significant bumps,” Ghali said. “We can see a scenario unfold where inflation drops due to a buyer strike which would lead to further downward earnings revisions and further drops in markets. That sort of environment could be very good for hedge funds, as it would likely create more volatility, and necessitate active management.”

Despite the opportunities, next year will be another challenging one for hedge funds.

“I don’t think 2023 is going to be plain sailing,” said Fawad Razaqzada, market analyst at StoneX.

Man Group’s Jones said that the pressure from monetary policy will impact both the real economy and financial assets.

“However, 2023 is going to be a second year where very dynamic investment strategies and risk management prosper,” he added.

To contact the author of this story with feedback or news, email Bilal Jafar

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