July 2024
Alan Dunne was back on Top Traders Unplugged speaking with Niels Kaastrup-Larsen about global macro developments, trend following and allocating to hedge funds.
The topics included:
Building a Hedge Fund Portfolio
They discussed key considerations when building a hedge fund portfolio and reviewed a paper from GIC/JPMAM which addressed this topic.
Some of the interesting findings from the paper included:
· Integrating the hedge fund portfolio into a 60-40 portfolio leads to a different optimal strategy mix than if the portfolio is constructed on a standalone basis
· In particular, the optimal portfolio shifts to a higher allocation to diversifying strategies like global macro, managed futures and commodities which tend to have greater “Loss Mitigation” characteristics
· Strategies like RV, credit and equity focused hedge funds tend to have more beta, less alpha and less favourable correlation to equities making them less appealing in the context of portfolios already holding significant equity beta
2. What do Allocators look for in new Trend Following funds?
They discuss the challenge for new trend following funds entering an already crowded space and how they might differentiate themselves
3. How CTAs can use commodity carry and delay in pursuit of the dual mandate of managed futures (absolute return plus crisis alpha).
They review a paper from ROW asset management which highlights that despite the perception of carry strategies as being convergent in nature and negatively skewed, an allocation to commodity carry can be complementary to both managed futures trend following and equities from both a return and skew/convexity perspective.
4. AI & the recent market rotation
They discussed recent market developments including the recent rotation in the stock market and a potential change in sentiment towards AI some analysts have started to question whether the spending involved in AI is excessive given the potential benefit.
5. The Trump Trade
They also chatted about recent global macro developments and examine to what extend the market is accurately pricing in a potential Trump second term. The implications for the US dollar are potentially significant (and bearish) given Trump’s recent comments on FX and trade imbalances.
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