Wednesday, February 16, 2005
David Mullins on HF Strategies to Favor/Avoid
Vega Chief Economist: Bush tax reform favorable to stock market, warns money flows `much quicker` today Matthias Knab reports from the 10th Mar/Hedge conference in Geneva: David Mullins, Chief Economist of the Vega Group and former Vice Chairman of the US Federal Reserve System, said the Bush tax reforms will be favorable to the stock market, but due to the large deficits unfavorable for bonds. He pointed out all of the reforms sunset after 5 years, saying the deficit “gets worked on”. His long term outlook for the dollar is bearish.
With Yale leading the way (70% in alternatives and 15% each in stocks and bonds), corporate and public pensions are now focusing and investing in hedge funds. Currently the estimated $50 trillion institutional assets have maybe a 0.5% allocation to hedge funds; if the institutions decide to up their stake to let’s say 3% this means trillions of additional assets.
An important consideration for institutions is that within alternatives, hedge funds are less correlated to the equity market than private equity (.69) and venture capital (.52). Manager selection is most important when investing in hedge funds. Compared with mutual funds, buyout and venture capital funds (as an analysis of the top quartile vs. bottom quartile returns), hedge funds boast the largest gap between these two quartiles. Mullins explained the different roles hedge funds have in today’s environment:
less regulated form for traditional banking activities
information discovery
soldiers of market efficiency
drivers of trading momentum and market turning points
market makers and providers of liquidity
Mullins outlined a medium term outlook for the following hedge fund strategies:
Favorable:
Macro: volatility increasing in FX, stock, bonds
event driven: increased merger activity
equity L/S: volatility, sector changes
Less favorable:
fixed income arb – tight spreads, flatter curves
credit – tight spreads
statistical equity arb – excess capital for opportunity
emerging markets – tighter spreads
convertible arb – tighter spreads
Mullins explained that today money flows much quicker into “windows of opportunities”. On the other hand, these windows tend to be open a much shorter time than previously. As a consequence, Mullins recommends only to under weigh strategies (versus completely getting out) in order to remain in touch with the market and maintain the ability to react.
With Yale leading the way (70% in alternatives and 15% each in stocks and bonds), corporate and public pensions are now focusing and investing in hedge funds. Currently the estimated $50 trillion institutional assets have maybe a 0.5% allocation to hedge funds; if the institutions decide to up their stake to let’s say 3% this means trillions of additional assets.
An important consideration for institutions is that within alternatives, hedge funds are less correlated to the equity market than private equity (.69) and venture capital (.52). Manager selection is most important when investing in hedge funds. Compared with mutual funds, buyout and venture capital funds (as an analysis of the top quartile vs. bottom quartile returns), hedge funds boast the largest gap between these two quartiles. Mullins explained the different roles hedge funds have in today’s environment:
less regulated form for traditional banking activities
information discovery
soldiers of market efficiency
drivers of trading momentum and market turning points
market makers and providers of liquidity
Mullins outlined a medium term outlook for the following hedge fund strategies:
Favorable:
Macro: volatility increasing in FX, stock, bonds
event driven: increased merger activity
equity L/S: volatility, sector changes
Less favorable:
fixed income arb – tight spreads, flatter curves
credit – tight spreads
statistical equity arb – excess capital for opportunity
emerging markets – tighter spreads
convertible arb – tighter spreads
Mullins explained that today money flows much quicker into “windows of opportunities”. On the other hand, these windows tend to be open a much shorter time than previously. As a consequence, Mullins recommends only to under weigh strategies (versus completely getting out) in order to remain in touch with the market and maintain the ability to react.
# posted by Tom @ 3:00 PM 
