The current macro backdrop sees moderate growth and evidence of continued disinflation, a conviction shared by Central Banks, which judge new rate hikes as improbable. With few tail risks clouding the short-term horizon, markets see a favourable asymmetry of risk that is boosting cyclical assets. Yet, macro uncertainty remains elevated amid data dependence, rate hesitations and a stretched cyclical rally. The economic cycle is also going through frequent inflections with uneven regional dynamics.
Implications for HF. Frequent macro inflections remain a challenge for top-down styles, which face market trials and errors. We expect a more supportive backdrop when a more convincing monetary policy pivot from the Fed materialises. Until then, we favour systematic over discretionary styles. We see equity volatility staying low in the short term, also limiting market timing opportunities. On the positive side, securities’ price increasingly reflects their underlying fundamentals – a consequence of elevated rates – which is highly favourable for hedge funds. Meanwhile, greater economic fragmentation opens relative arbitrage opportunities. As a result, securities-picking is shining, amid collapsing correlations. The return of corporate activity, a source of micro catalysts, provides additional good news for event driven and long/short equity strategies.
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