Dubai: As inflation picks-up and rates rise, UBS, which manages trillions of dollars of clients money, prefers to look at hedge funds as an alternative as co-relation between asset classes break down.
Hedge Funds have historically outperformed other asset classes when monetary policy tightens, returning an average annualised 11 per cent versus 8 per cent for the S&P 500 during the 1994—95, 1999—2000, and 2004-06 hiking cycles, providing diversification in case of higher equity-bond correlations.
“One area that we are looking at is that hedge funds in the past have tended to outperform the S&P 500 in a rising rate environment,” Mark Haefele, global chief investment officer at UBS told Gulf News.
“We would expect that as rates goes up, and central bank stimulus comes out, not all assets will trade together, the co-relation will break down, and that would be the environment where hedge funds could perform better, so that’s an alternative that we will look at,” Haefele said.
UBS advises investors to allocate 14-18 per cent of their portfolio
assets to hedge funds. Investors with a higher illiquidity tolerance could allocate up to 40 per cent to non-traditional markets as a whole.
But even in a rising rate environment, investors can still make some money in equities.
“We still think it’s not the time to get out of equities as yet because when you move from mid cycle to late cycle that’s where you can get a lot of gains,” Haefele added. Investors can benefit from diversifying the portfolio globally because not all central banks will behave in the same manner in terms of monetary policies.
UBS recently made a few changes to its currency allocations.
“We are no longer underweight the swiss franc against the euro, we have a an overweight on the Swedish Krona, and underweight on Norwegian krona. The Inflation dynamics are different in these economies and we are overweight Canadian dollar versus the US dollar because the Canadian economy is coming back well,” he added.
During the interview with Gulf News, Haefele shared many investment ideas, that may be beneficial in the course of time. He said one way to benefit from the tensions in the Middle East is through crude prices, which he expects to be stable, by looking at European and American energy companies because of attractive valuations. They will be overweight Chinese equities in case of any conflict with North Korea.
But generally UBS is watching the situation in China amid a slowdown in the housing market.
“It’s a key risk factor that we are watching. They have done a great job in managing a slowdown in the economy. We would be concerned if we saw another resurgence in strong forex outflows,” he said.
Haefele expects the pound to be stable around current levels for the six months because “it already has been hit pretty hard.” UBS is underweight UK equities, and overweight European equities, where firm growth feeds into higher earnings.
A lot of investors particularly in this region were having trouble understanding the direction of the geo-politics, according to UBS. “They thought about the Arab Spring, Brexit and the US elections and they wondered if populism is under an uncontrollable trajectory. [But] after the election of President Macron, they thought that the world is not being turned upside down. From being deeply concerned to moderately concerned, not all investors are piling into equities thinking that they will only go up,” Haefele said.
“We have noticed among institutional investors are shifting towards being more bullish. We were anti-consensual of being overweight on equities, say, into the summer. A lot of people have now moved to that view, which makes us a little bit nervous, and that means we review our analysis more closely,” he added.