July 12, 2013 / 2:30 PM / 7 years ago

Quotebox - Hedge funds' views on QE slowdown

LONDON (Reuters) - Hedge funds have used the sell-off in financial markets in recent months as a buying opportunity, betting that an ending to U.S. quantitative easing will favour their ‘stockpicking’ style once again. <ID:L5N0F23YD>

The following are quotes from fund managers on the impact of the prospective withdrawal of QE and their best investment opportunities:


Philippe Gougenheim, CEO of Swiss-based Gougenheim Investments and former head of hedge funds at Unigestion:

“The sell-off at the short end (of the yield curve) was totally unjustified. We’re very far away from rate hikes, at least two years.

“It was very interesting where positions were in the big sell-off. It turns out long U.S. equities is the least crowded trade.

“Whatever Japan does, it’s doomed. There are many things a central bank can’t fix, such as demographics. I’d stay away from the Japanese bond market at the moment.”


Justin Sheperd, partner at Aurora Investment Management, which manages $10 billion:

“I wouldn’t say we’ve seen a consensus on the U.S. 10-year (bond). Managers are approaching it from both sides. It’s less the case in hedge funds than in mutual funds that people think there’s now a big buying opportunity in 10-year yields.”


Scott Gibb, partner and portfolio manager at Cube Capital, which runs $1.3 billion:

“(Bernanke has) whipped a lot of complacency out of the market, particularly in very complacent carry trades. The Fed may wait till Q1 2014 to taper and early 2015 to raise interest rates.

“We’ve put on credit and equity shorts, and some very specific commodity shorts. If rates normalise, then investment grade credit is trading very tight - we’ve got a small short position that we intend to build up.”


Sal Naro, founder of U.S.-based Coherence Capital and former co-managing partner at $4.8 billion fund firm Sailfish Capital:

“In a broken market patience is important. We’re looking for some stability in the market from a rates perspective and we’re looking for equities to stabilise and not trade in a 150-point range in one day.

“You can always go in and pick up a few bargains, but your bargain today may fall in price tomorrow.”


Gennaro Pucci, founder of PVE Capital:

“We suspect investors have bought credit without thinking about the potential volatility of this asset. In the new regime of higher volatility, I suspect credit investors are not necessarily ready to take these risks.

“I suspect we’re still very early in the cycle of outflows from portfolios. Until we see volatility going down, we’re not buying markets.”


Tim Haywood, investment director at GAM, which manages more than $53 billion across traditional and alternative funds:

“For bond markets and the path of interest rates, inflation and default risk should determine bond prices. The arrival and departure of a big buyer should not have a permanent impact on the (fixed income market).”

“Long term this move (sell-off in bonds) could happen again but we don’t see it being immediately replicated.”


Basil Williams, deputy chief investment officer of U.S.-based Mariner Investment Group, which manages $10 billion:

“We believe his (Bernanke’s) comments have been instructive to market participants to remind everyone that there is duration risk in any fixed income asset. The uptick in volatility is healthy for the market. It’s a good development, people had forgotten there was risk in these assets.

“The most interesting dispersion is the underperformance of emerging market equities versus developed market equities. It actually flies in the face of the global economy really growing because of emerging markets... It seems to be a bit of a conundrum for markets.”

“We are moving from a scenario where all rates move together, to one where U.S. rates, Japanese rates, European rates, move in their own direction.”


Eric Curiel, strategist, Esemplia Emerging Markets:

“The slowdown in China is as important for emerging markets as U.S. QE is. For the last 10 years, emerging markets have had cyclical tailwinds. The structural story remains, but now you’re seeing cyclical headwinds.

“On a longer-term perspective, Indonesia remains one of my favourite markets. It has good demographics (and) the central bank has jumped in front of the curve and decided to hike rates.”


Guillaume Fonkenell, CIO at Pharo Management, which manages around $2.7 billion in assets:

“We are now even more negative on emerging market FX (currencies) due to our expectation that inflows into emerging markets will slow down.”

“The chase for yield is dead for now because of the “fear” of tapering. However, the market will eventually conquer its fear and the chase for yield will resume.”


Louis Gargour, CIO of LNG Capital:

“Where do you go? You go to growth asset classes in the States. You go into high yield.

“I think you need to come out of investment grade very quickly, and you need to come out of long duration government bonds (and) I think you need to be very careful about emerging markets.”


Barry Norris, fund manager at Argonaut Capital Partners:

“You never truly appreciate the value of a properly hedged absolute return fund until a market puke, the like of which we witnessed in June.

“We continue to be as excited about the potential in our short book of overvalued companies as we are in our long-book of undervalued stocks. Europe remains a true stock-pickers’ paradise in this regard.”


Manager at a multi-billion dollar hedge fund firm:

“The Fed funds rate is not going up much, if at all, in the next one-to-two years, and it’s very difficult with the Fed funds rate where it is for 10-year yields to rise above 3-3.5 percent - it’s a natural ceiling.

“(At that level) it’s becoming attractive for pension funds and insurance companies once again.”


Manager at major hedge fund firm:

“Usually the Fed gets it right. They’re not doing it to destroy a bubble, they’re doing it because there’s real growth.

“Yields are probably going higher over the next year or two. By the time they hike - my base case is mid 2015 - (10-year yields) will probably be at 3.5-to-4 percent.”


Tanguy Le Saout, Head of European Fixed Income, Pioneer Investments:

“We have become more cautious on EMU (European Monetary Union) periphery markets as spreads declined, even more so as the U.S. Federal Reserve plans to taper off its QE program.

“We are not arguing that the Fed’s (probably gradual) new course will undermine peripheral countries’ fundamentals, but we are mindful that some investors would be less hungry for yields and credit markets would suffer somewhat under the new scenario.”

Reporting by Laurence Fletcher, Tommy Wilkes and Sinead Cruise; Editing by David Cowell

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