SOME global hedge fund investors are going into 2021 optimistic about a speedy snap-back from the economic challenges related to the COVID-19 pandemic.
Hedge funds, which use leverage and employ more aggressive, often riskier strategies than other investors, believe many previously undesirable sectors, ranging from energy to retail, will rebound in 2021.
Accounting for roughly US$3 tril in assets, hedge funds showed resilience in 2020, with many outperforming the market, according to investors.
“We think 2021 is going to be a really positive year for the markets,” said Toronto-based hedge fund Donville Kent Asset Management president and CEO Jason Donville.
He forecasts an explosion of pent-up demand for travel and leisure producing a period of “super growth.”
“I think it will take a little while for the vaccines to roll out and then somewhere around March, April, May, you’re going to get a confluence of the vaccines getting to a certain critical mass and infection rates dropping.”
For 2020 as a whole, the S&P 500 unofficially rose 16.26%, a stunning rally from a bear market that kicked off when the pandemic spread rapidly earlier in the year.
“What I would say about 2021 is it looks like it’s going to be a year of recovery,” said UK-based Capital Generation Partners chief investment office Robert Sears, which invests in hedge funds globally. “That’s the consensus view.”
The gainers in 2020 included the S&P 500 Information Technology Sector, up more than 42% as the sector benefited from the abrupt acceleration of online trends.
On the other hand, the S&P 500 Hotels Restaurants and Leisure had a gain of 1.4%.
In the past quarter, however, leisure stocks have rebounded as vaccine rollouts have accelerated hopes of recovery.
“I think macro conditions are going to continue to be quite volatile, so macro should have a good year,” said Sears, referring to funds that invest according to macroeconomic trends.
He added that funds that specialise in currencies and commodities should do well.
Brandywine Global portfolio manager Jack McIntyre said there will be “less uncertainty and more certainty” in the new year.
Financials are a sector that has been challenged by COVID-19 and could be supported by a recovery, said Philippe Ferreira at Paris-based fund of hedge fund Lyxor Asset Management, adding that the sector typically performs better in the initial stage of a recovery.
“Managers are easing the short bias toward financials because we are entering a recovery,” said Ferreira, whose firm invests in hedge funds globally.
The S&P Financial Index fell around 4.3% in 2020 despite rebounding in the fourth quarter.
“On the macro side, managers say that with rates so low, they are diversifying fixed income with inflation and especially on the US side and gold,” said Ferreira.
North American energy is another beaten-down sector popular with hedge funds, market participants said. The Canadian Energy Sector Index lost 37.8% over the entirety of 2020 while a comparable index for the US fell 37.3%.
“Anything in energy…all of that is a COVID-19 recovery play to the extent the demand for fuel goes up, people start going back to the office more,” said one Canadian hedge fund manager.
“We’re adding the names like AltaGas, Pembina and Canadian Natural Resources and we’ve been a buyer since post-the US election.”
AltaGas stock plummeted 60% in March and is down 5.1% for the year through Dec 31. Shares in Pembina and Canadian Natural Gas fell 61.3% and 27.3%, respectively, over 2020.
“I would say that energy consumption is going to make a very healthy recovery and probably continue on an above-historical year-on-year level,” said New York-based metals-focused Valent Asset Management portfolio manager Jay Tatum.
He added that oil was only one source of energy that would see growth. – Jan 4, 2021
