A great deal of opportunity it turns out, if you listen to the world’s biggest money manager BlackRock.
Despite citing some startling statistics at a briefing in London today – more on that later – its strategists think increased volatility in markets this year will open up a pandora’s box of opportunity for smart managers.
BlackRock alternative advisors’ Mark Woolley said there are three major things unfolding in the financial world that present good opportunities for hedge funds to drive up returns.
1. Disintermediation of banks
With banks scaling back their lending, there should be more scope for hedge funds to step in and take senior positions in the credit structures of companies. “The change in the banking model continues to profoundly impact the market place,” Woolley said.
2. Shift from beta to alpha
The markets are more bullish after last year’s surge in equity values but credit spreads and the performance of good companies and bad companies should widen, giving more room for traditional long/short funds to do well. “More volatility will punctuate the market in 2014,” Woolley added.
3. Change in emerging markets
With significant financial constraints in emerging markets, Woolley says we'll see heightened volatility, with distressed corporate debt in LatAm and Asian countries presenting good opportunities for hedge funds.
It’s notoriously difficult to pick out the hedge fund winners from the hedge fund losers, and this seems to feed into the feelings of institutional investors, like pension funds, insurers and sovereign wealth funds.
BlackRock cited a survey of its institutional investors which showed 28 per cent of their global clients wanted to increase allocations to hedge funds while in Europe, middle east and Africa the opposite was true – 35 per cent wanted to cut back.
With a new world of financial opportunity seemingly set to unfurl this year, it will be interesting to see if that 35 per cent are getting cold feet at precisely the wrong time.