Written by Carolina Mandel, Neil McKenzie, and Samer Zain

NEW YORK/LONDON/HONG KONG (Reuters) – Having survived the 2022 crisis, many global hedge fund managers are bracing this year for sustained inflation and seeking exposure to commodities and bonds that perform well in such an environment.

The majority of the 10 global asset managers and hedge funds polled by Reuters said commodities are undervalued and should thrive as global inflation continues to rise in 2023.

Their other top picks included inflation-linked bonds to protect against price hikes and selective exposure to corporate credit, where higher interest rates restore some differentiation to corporate bond spreads.

Stocks top the list of assets to avoid or short sell: Equity markets were affected by the sudden tightening in monetary conditions last year and many companies could see an even greater erosion in their earnings in 2023.

“It looks like the stock markets are pricing in what I would call the impossible trinity…that we’re going to have rates lower, we’re going to have inflation that’s going to stay and earnings are flexible,” Jordan Brooks, co-head of macro strategy at $143 billion AQR Capital Management, told a conference call last month. .

Brooks said this scenario is very optimistic and recommended a risk-reward investment approach that weights asset risks across stocks, bonds and commodities.

Investment data firm Preqin estimates hedge fund returns were negative 6.5% in 2022, the sharpest decline since a 13% drop in 2008 during the global financial crisis. Only 915 hedge funds were launched in 2022, Breckin said, the lowest level in 10 years.

London hedge fund manager Crispin Oddy, who profited last year from short positions in British government bonds, is betting that inflation will remain high. Odey’s OEI MAC fund ended 2022 up about 145% for the year, and although it cut its short position in gold bonds, it has long been linked to inflation.

“Commodities will start to rise again. They have been sold very heavily and are below operating costs in many cases,” Uddy told Reuters.

“But having sterling – if it crashes, it would be a very serious break. I don’t know when it will happen, but it could happen.”

Most of the hedge fund managers Reuters spoke to believe long-term equity strategies will remain unfavorable after last year’s underperformance, while macro-driven strategies that exploit volatility and can be long or short of any asset will stretch long.

“We’re optimistic about strategies that take advantage of volatility,” said Joe Dowling, global president of Blackstone (NYSE: Alternative Asset Management), which oversees nearly $80 billion in hedge fund investing. “It’s the perfect environment for macro hedge funds: Central bank policy divergence, interest rate differentials, geopolitical tensions, bottlenecks and each country on its own. It offers a lot of opportunity.”

Macro hedge funds led the industry’s performance through November, according to financial data firm HFR, up nearly 8%.

Kevin Lyons, chief investment director at Hedge Fund Solutions at abrdn, which has $14 billion in offshore hedge funds, expects a mild global recession next year.

Lyons is keen to allocate more to macro hedge funds and also believes there are good opportunities in corporate credit.

“If you can find a good company with a good balance sheet, they’ll probably trade more widely than they did three years ago. And you get paid to weather what could be some of the volatility in the markets now,” Lyons told Reuters.

Daniel Pezzo, chief strategy officer at Schonfeld Strategic Advisors, which manages the allocation for multiple strategies, also aims to focus more on investment-grade and high-yield bonds this year in addition to commodities.

Making the downside case for such credit is Boaz Weinstein’s $9 billion from Saba Capital Management, which has been short European corporate credit all year.

“There’s a huge risk that something will break in the market…whether it collapses because of inflation or because some sectors are creating a wider spread of default,” Weinstein said. “Our base case is that credit risk will be challenged next year.”

Stay out of stock

Andrew Swan, ex-Japan Asian head of equities at Man GLG, part of British alternative investment group Man Group, is wary of companies in Asia exposed to developed markets, as he expects inflation problems and slower growth.

“We are negative about Taiwan in general, which is more vulnerable to global growth,” Swan said.

Most of the hedge funds Reuters spoke to are bearish in stocks, especially if the Federal Reserve continues to raise interest rates to fight inflation.

Kenneth Trubin, founder and chairman of the $19 billion Graham Capital Management, pointed out that US Fed funds futures prices are up 5% in 2023 and down to 3.5% by mid-2024, which means that the market You expect inflation to cool significantly throughout the year.

Tropin thinks this is overly optimistic: while it will take longer for inflation to subside, the economy will slow. “I’m not convinced that stock prices really reflect this erosion of earnings. I think stocks look very expensive,” he said.

As was the case in 2022, correlation between individual stocks is likely to be high this year, making it difficult to implement long and short strategies, some fund managers said.

While stocks fell last year, their movements were controlled and slow, crushing volatile trading as well.

Raanan Agus, global co-chairman and co-chief investment officer at Goldman Sachs (NYSE: Asset Management’s Alternative Investments & Manager Selection), which manages a hedge fund with nearly 100 managers, told Reuters they: “They focus on hedge funds that are not market-linked or less connected to the market.