The Fed isn’t going to cease to inject liquidity until the first quarter of 2014 at the soonest, says Troy Gayeski, Senior Portfolio Manager at Skybridge Capital. Also, the Federal Reserve will not hike interest rates until end of 2014, early 2015. The more important recent catalyst, however, has been Japan’s aggressive monetary easing. That’s one reason why most hedge funds believe asset prices are going to inflate, he added.
Asked to comment about the market’s perception of tail risks and the measures needed to protect from the downsides, Troy said most hedge funds that run fixed-income portfolios tend to be duration neutral, which has been a bad strategy for the last 30 years.
However, at this stage of the cycle – with interest rates so low, it seems logical to be short duration. Though it’s a money losing trade, it seems to be a very good cost-benefit for guys who wish to hedge front-end risks if the Fed were to hike rates. No one expects the Fed to surprise the markets, but if it costs five or 10 basis points a month or a quarter to hedge a significant rate rise, then why not, he argued.
Asked to comment about the effect of Fed’s policies on equities, Troy said the consensus fund manager view is that the asset reflation that is being witnessed now is going along the way the Fed would prefer. It has taken the Fed a long time to reflate house prices and they would prefer 20-30 percent appreciation in the segment.
Similarly, equity multiples are expanding and Skybridge is expecting a price-multiple of 20 in the next six to 12 months, he observed. Though it may seem a little on the richer end, compared to other asset classes like high-yield bonds, equities are still cheap; and if the Fed has its way, they will get on the richer end as well.
Asked to comment on gold, Troy said like many assets, gold has gone through long bull runs and more than likely peaked back in 2011. It had a beautiful trend, the fundamentals continued to improve in 2010 and 2011 and everything that could go right did go right for gold. The top finally blew off in August 2011, and the trend cracked. Since then it has traded sideways for a long time and finally it cracked again recently. Gold’s future is dim because if the US economy starts to strengthen and the dollar appreciates, more and more investors will get rid of gold.
There’s good growth and no inflation in the US, and there are other investments, like real-estate, to hedge inflation. Most hedge funds are opportunistic, and they have already washed their hands off gold. The ones that are still betting on gold are more long-term investors and since gold is a small percentage of their portfolios, they hope to offset the losses, if any, from other bets, he concluded.
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