Due to their unique characteristics, we are taking a differentiated look at liquid and illiquid alternative investments1.
Likely increased equity-market volatility will favor managers operating with a low-net-exposure book and those seeking to gain from a reversion of relative sector valuations that arose from the unexpected fall in long-term interest rates during 2014.
Macro managers could benefit from foreign-exchange (FX) moves driven by central-bank policy divergence, from differing views on future U.S. nominal rate increases and from equity relative-value trades. CTA could benefit from increased asset-class divergence.
Strategies based on relative valuation between secured and unsecured debt within companies and within industries may be promising. There will continue to be select opportunities for longer-term strategies in structured credit.
Mergers and acquisitions activity continues to increase. Spread widening on previously announced deals may create interesting entry points where the underlying fundamentals are unchanged. Energy-sector consolidation is also worth watching.
Opportunities remain in the U.S. small- and mid-market segments despite high levels of callable capital reserves. In Europe, the number of large private equity deals increased in 2014 but continued economic weakness may start to have an impact.
Expected initial yields will remain attractive relative to sovereign yields. U.S. property markets will benefit from higher gross domestic product (GDP) and a strong U.S. dollar will lower inflation risk. We would position European portfolios to capitalize on the potential effects of QE.
Budget constraints confronting many governments suggest that the financing of investment will move toward private sources. Investors have a range of options, which can suit different risk/return profiles and other investment needs.
There remain interesting opportunities for longer-term strategies, particularly within activism, certain elements of structured credit, insurance-linked assets, secondaries, regulatory capital arbitrage and direct lending.