After the strong recovery of the stock market this year and the continued rise of short-term yields, markets have started to calibrate, moving toward markets of greater dispersion (an increasing gap between best and worst performing economies and assets) and volatility, which is brought about by a few factors. These include a continued decoupling of the global economy and policy actions, a well-anticipated slowdown in economic activity, and a rise in geopolitical risks. All of this adds up to an environment that’s potentially favorable for strategies that are nimble, can generate excess returns from both topdown macroeconomic forecasts as well as bottom-up fundamental analysis, have limited market sensitivity, and can take advantage of increased volatility. It’s also time for a deeper look into each manager’s investment approach. We anticipate that risk management can pay off as a greater range of performance within each strategy is expected. Staying responsive to market nuances will be key.

Among hedge fund strategies, we maintain a positive outlook on global macro strategies that can capitalize on the macro dispersion across the regions and tend to benefit from higher volatility. We also expect managed futures to continue to serve as a diversifier for portfolios that are mainly comprised of stocks and bonds. In addition, we believe bottom-up, fundamental-focused strategies that can limit market risk (both in stocks and bonds) now have a richer trading environment where they can generate excess returns from both the long and short sides of their portfolios amid rising dispersion in company fundamentals. Lastly, we continue to monitor distressed/special situation strategies, as we observe the high interest costs seeping into companies’ fundamentals and a pickup in corporate downgrades.

While we are positive on these strategies, it is important to monitor the potential risk of economic, political, and geopolitical surprises, position concentration, and the impact of leverage usage that could affect performance. Among private market strategies, we expect private credit and infrastructure to continue to show their resilience as both strategies have long-term economic trends in their favor. For private credit, strong demand from borrowers and high base rates makes current vintages quite attractive. That said, we are mindful of the potential stress that high borrowing costs could place on businesses and the overall sector.

Given sufficient yields on high-quality loans, we favor portfolios that are focused on senior secured loans with low leverage. Within private credit, we also favor portfolios with flexible and broader mandates that can diversify their positions beyond direct lending and participate in unique opportunities, such as distressed or special situations. In addition, we see compelling opportunities in the secondary markets where managers can find better supply/ demand balance and narrow the bid/ask spread. This is a positive signal for both sellers looking for liquidity and buyers looking to capitalize on discounted pricing in beaten-down sectors.

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The opinions, statements and forecasts presented herein are general information only and are not intended to provide specific investment advice or recommendations for any individual. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. There is no assurance that the strategies or techniques discussed are suitable for all investors or will be successful. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any forward-looking statements including the economic forecasts herein may not develop as predicted and are subject to change based on future market and other conditions. All performance referenced is historical and is no guarantee of future results.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Event driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All index data from FactSet. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
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