Due to their unique characteristics, we are taking a differentiated look at liquid and illiquid alternative investments.
Increased equity-market volatility will favor managers operating with a low-net-exposure book and those seeking gains from relative sector valuation reversions, after the dislocation due to unexpectedly low long-term interest rates.
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. Increased asset-class divergence could benefit CTA .
Strategies based on relative valuation between secured and unsecured debt within companies and within industries may be promising. There will be selective opportunities for longer-term strategies in structured credit.
Spread widening on recent announced deals, after some deal breaks in 2014, may create interesting entry points where the underlying fundamentals are unchanged. Energy-sector consolidation is also worth watching.
Opportunities remain in U.S. small- and mid-market segments despite high levels of callable capital reserves. In Europe, large private-equity-deal numbers 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 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 to suit different risk/return profiles and other investor 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.