Despite the fact that hedge funds suffered biggest capital outflows in the past quarter since Q1 2009, the midst of the financial crisis, Hedge Fund Research is optimistic about the coming year.
During an outlook event in London, Kenneth J. Heinz, president of HFR, predicted which hedge fund strategies will most likely record strong performance this year.
1. Macro: Discretionary Thematic
Heinz said macro strategies will be the main winners in 2017. Within the macro basket, he cited discretionary thematic strategies as likely to outperform all other hedge fund sub-categories in 2017.
HFR defines discretionary thematic as strategies which are primarily reliant on the evaluation of market data, relationships and influences, as interpreted by an individual or group of individuals who make decisions on portfolio positions.
These strategies employ an investment process most heavily influenced by top down analysis. Within the wide marco category, Heinz said the other sub-strategy which is most likely to outperform is CTA.
He predicted the key macro themes which hedge funds might play in 2017 include the first 100 days of President Trump, the aftermath of the Brexit referendum, as well as elections in four European countries (Netherlands, France, Germany and Italy).
2. & 3. Event Driven: Distressed and Activist (tie)
Distressed and activist strategies, both belonging the wider event-driven category, are the joint runners-up in terms of expected performance this year.
Activist strategies may obtain or attempt to obtain representation of the company's board of directors in an effort to impact the firm's policies or strategic direction.
Distressed restructuring strategies, on the other hand, employ an investment process focused on corporate fixed income instruments of companies trading at significant discounts to their value as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.
Equity and credit-sensitive event driven (ED) strategies – including M&A, Special Situations and Distressed – led industry performance for December and 2016 as a whole.
4. Equity Hedge: Energy/Basic Materials
Finally, the fourth best performing strategy in 2017 according to HFR’s president is set to be energy/basic materials. This strategy sits within the equity hedge category, in which the manager maintains positions both long and short in primarily equity and equity derivative securities.
In the energy/basic materials sub-category, a manager maintains in excess of 50% of portfolio exposure to these sectors over a various market cycles.