New York (HedgeCo.net) – Some of the biggest areas of negative impact on hedge funds this year came from equity bets in the energy and healthcare sectors and distressed debt. A recent report from the co-heads of Neuberger Berman’s Alternative Investment Management division makes the case for those same areas being a source of outperformance in 2016.
The report was written by Jeff Majit and David Kupperman and it makes a pretty compelling case that 2016 will be a better year for the hedge fund industry. One of the first points the report made was how quantitative easing programs around the world created a difficult environment for shorting stocks which is a key component for any long/short strategies or market neutral strategies. With the Fed finally raising rates and backing off on their bond-buying programs, it should be a better environment for these strategies. In particular the fall in oil prices and political-fueled rhetoric caused across the board declines in the energy and healthcare sectors. Once these broad-market events settle a little, the ability to use stock picking capabilities will allow hedge funds to outperform.
Another point the report made was one we made recently and that was how there were certain trades that were simply too crowded with hedge fund money. The report supplied interesting facts as to the performance of the most crowded trades in the second half of 2015 and how these trades exceeded the losses of the S&P 500 by 15%. Similarities occurred in late 2008 and in October 2011, but after those periods, the returns for hedge funds far exceeded the returns of the S&P in subsequent months.
Finally, the report addressed the distressed debt market and how the total amount of debt priced below 50 cents on the dollar now exceeds $100 billion in face value and that the dollar amount of companies that have moved from investment grade to junk status on a year to date basis exceeds 2012, 2013 and 2014 combined. In the view of the two authors of the report, this creates one of the best environments for distressed debt since the end of the financial crisis.
Rick Pendergraft
Research Analyst
HedgeCoVest
