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Global Hedge Funds Plan 2023 on Inflation Risks by Reuters

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© Reuters. FILE PHOTO: Flags are seen outside the New York Stock Exchange (NYSE) in New York City, as markets tumble after Russia continues to attack Ukraine, in New York, US, February 24, 2022. REUTERS/Caitlin Ochess

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.

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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.

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“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%.

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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.

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“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.”

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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.

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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.

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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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Economic

German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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