Rothschild Wealth Management July summary. Below is an excerpt on alternatives, followed by the full document in pdf.
Rothschild WM: Liquidity returns home
Emerging markets (EMs) have been one of the main beneficiaries of additional liquidity provided by central banks in developed countries. During June they suffered as easy liquidity returned home. The correction is being exacerbated by individual problems in some major economies, notably China and Brazil, which are both tightening monetary policy amid lower growth. Additionally, there are rising political tensions in some other major EM countries, including Turkey, Indonesia and Brazil, which are related to their respective reform requirements.
Rothschild WM: A cyclical adjustment
Further adding to market volatility is the fact that credit market liquidity has shrunk under the effect of tighter capital rules imposed on global investment banks. The trigger for the recent weakness remains the anticipated end of QE. The result is likely to be further yield increases and currency weakness across EMs. However, analysis shows that this looks more like a cyclical adjustment rather than the warning sign of a generalised EM balance of payments crisis.
Although many EM budget surpluses have shrunk over the past five years as they rebalance towards domestic demand, many remain net creditor nations and have powerful underlying growth drivers. Given the extent of the recent market correction, however, it will take time and patience for confidence in the fundamentals to return.
Rothschild WM: Improving outlook for alternative strategies
Hedge funds have also suffered from recent market events with Bernanke’s comments in late May bringing gains made so far this year to a halt. Managed futures funds (CTAs) suffered from falling asset prices in late May with long positions in longterm government bonds hurting the most. Yet recent events do not change our view that CTAs offer attractive and cheap portfolio insurance.
The outlook for sources of potential return over the next six months has improved. In rising markets, long-short equity and event driven managers with a long bias are likely to perform well. Increased corporate activity should also help event driven funds. Exposure to diversifying strategies, such as global macro, remains key.