Key Takeaways
- • Man FRM, the funds-of-funds unit of Man Group, described an "unusually large" spectrum of hedge fund opportunities in its Q1 2021 strategy outlook, published Thursday, citing a spring economic recovery, dovish central banks and ongoing fiscal support.
- • Credit, equity long/short, macro and relative value strategies are positioned to benefit as the equity rally is expected to extend, with low rates and abundant liquidity supporting expensive valuations.
- • CIO Jens Foehrenbach flagged risks including sharp interest rate hikes, sector rotations, record concentration of the top five S&P 500 stocks, and a premature withdrawal of Covid-era stimulus.
- • Foehrenbach advised investors to seek managers who generate alpha from a changing opportunity set rather than static directional bets, with portfolios aimed at diversification rather than beating a strong equity market.
- • Man FRM highlighted convertible arbitrage, structured credit, distressed debt, merger arbitrage and statistical arbitrage as areas with near-term opportunities.
Summary
Man FRM, the funds-of-funds unit of Man Group, is optimistic about what it describes as an "unusually large" range of hedge fund strategies, according to its Q1 strategy outlook published on Thursday. The firm expects a spring economic recovery, dovish central bank stances and ongoing fiscal support to sustain and extend the market rally, particularly in equities. Stronger earnings and multiple expansion are underpinning increasingly bullish investor sentiment for 2021, especially in US equities, with low interest rates and abundant liquidity supporting expensive valuations.
Jens Foehrenbach, Man FRM's chief investment officer, acknowledged that "speculative excesses" could create risks later in the year, including sharp interest rate hikes, sector rotations and policy mistakes such as a premature withdrawal of stimulus. He stressed that portfolio positioning should provide diversification if the bullish equity view proves wrong, "not to beat the market if we experience a strong year for equities." He argued that investors should focus on managers who can generate alpha from the changing opportunity set rather than taking static directional bets.
For equity long/short managers, Foehrenbach pointed to stock dispersion and room for recovery in European equities relative to the US. He also advised attention to managers' sensitivity to shifts between growth and value leadership, given the threat of rotations and the record concentration of the top five stocks in the S&P 500. In credit, Man FRM sees opportunities for long-short managers to exploit winners and losers created by Covid-19, as well as dislocations in capital structures that have produced profitable debt-versus-equity trades. Convertible arbitrage, structured credit and distressed debt are also seen offering near-term opportunities.
Discretionary macro managers may benefit from elevated cross-asset volatility tied to interest rate moves and inflation expectations, as well as from divergent recovery rates and fiscal policies across regions. Systematic macro and trend-following strategies are supported by the stabilising Covid situation, with innovation in quantitative FX overlays, low-cost trend following and systematic tail hedges. In relative value, Man FRM is positive on classic merger arbitrage, benefitting from improving deal activity, and on broader event strategies targeting hard and soft catalysts. Quantitative micro strategies such as statistical arbitrage and systematic credit are expected to benefit from ongoing stock price dispersion and reversionary forces.
Jens Foehrenbach, Man FRM's chief investment officer, acknowledged that "speculative excesses" could create risks later in the year, including sharp interest rate hikes, sector rotations and policy mistakes such as a premature withdrawal of stimulus. He stressed that portfolio positioning should provide diversification if the bullish equity view proves wrong, "not to beat the market if we experience a strong year for equities." He argued that investors should focus on managers who can generate alpha from the changing opportunity set rather than taking static directional bets.
For equity long/short managers, Foehrenbach pointed to stock dispersion and room for recovery in European equities relative to the US. He also advised attention to managers' sensitivity to shifts between growth and value leadership, given the threat of rotations and the record concentration of the top five stocks in the S&P 500. In credit, Man FRM sees opportunities for long-short managers to exploit winners and losers created by Covid-19, as well as dislocations in capital structures that have produced profitable debt-versus-equity trades. Convertible arbitrage, structured credit and distressed debt are also seen offering near-term opportunities.
Discretionary macro managers may benefit from elevated cross-asset volatility tied to interest rate moves and inflation expectations, as well as from divergent recovery rates and fiscal policies across regions. Systematic macro and trend-following strategies are supported by the stabilising Covid situation, with innovation in quantitative FX overlays, low-cost trend following and systematic tail hedges. In relative value, Man FRM is positive on classic merger arbitrage, benefitting from improving deal activity, and on broader event strategies targeting hard and soft catalysts. Quantitative micro strategies such as statistical arbitrage and systematic credit are expected to benefit from ongoing stock price dispersion and reversionary forces.
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