Due to their distinct characteristics, we take a differentiated look at selected liquid and illiquid alternative investments.
The HFRI Equity Market Neutral Index was up around 3.5% year-to-date at the end of September, with very low realized volatility . September proved to be a particularly strong month. We continue to hold a positive view on this segment as the trading environment remains favorable for arbitrage -orientated equity strategies, with dispersion between stocks, sectors and style factors likely to remain a key performance driver. Equity-market liquidity is also healthy after reduced levels over the summer period. Furthermore, the third-quarter earnings season should provide further reasons for differentiation between individual stocks and market sectors. Note also that equity-market-neutral strategies’ correlation to general equity indices and other traditional assets remains very low, highlighting the diversification potential of such strategies if volatility picks up.
Valuations could now be a concern, with the increased availability of debt financing and high levels of “dry powder ” (easily deployable funds) driving up prices. U.S. utilities with strong growth prospects remain attractively valued, however, and some firms in regions with positive fundamentals look attractive – Mexican infrastructure companies, for example, stand to benefit from both good economic fundamentals and supportive infrastructure reforms. High valuations and economic worries however cast a shadow over Chinese infrastructure. At a sectoral level, the hotel sector is likely to remain a bright spot. The volume of European hotel transactions is up 58% so far in 2015 (at end of September) compared with the equivalent period of last year.1
Developed-market real estate looks well-supported despite worries about faltering global growth. Falling levels of unemployment are underpinning demand for commercial property and still low interest rates make property yields attractive relative to those available on long-term government bonds. Investment inflows have maintained high valuation levels. In the emerging markets, supportive policy from China, South Korea, Australia and Japan has encouraged investment. Strong investor demand and positive sentiment have however made valuations look increasingly high in European real estate, although supportive monetary policy here too should sustain both capital growth and income opportunities.