Five prominent hedge funds shared five ideas using five
different asset classes to profit from inflation so pugnacious
it might force the Federal Reserve to keep interest rates higher
for longer.
The ideas do not represent the trading positions of the
firms, which cannot be revealed for regulatory reasons.
1/ GRAHAM CAPITAL MANAGEMENT
* Systematic and actively managed macroeconomic funds
* Size: $18 billion AUM
* Founded in 1994
* Key trade: U.S. Treasuries - Buy 2-year, sell 10-year
Ken Tropin, chairman and founder of Graham Capital, said
if interest rates remain higher, then long-dated government
bonds such as 10-year U.S. Treasuries are too "expensive"
compared to 2-year notes, as they yield so much less.
The U.S. yield curve, as measured by the gap between two and
10-year yields is at its most inverted in decades in a sign of
recession risk. Yields move inversely to prices.
"If you think the yield curve is going to normalise, that's
how you execute that trade," said Tropin.
2/ MAN GLG, a discretionary fund inside Man Group
* Actively managed
* Size: Man GLG is a $24.1 billion fund, part of the $138.4
billion Man Group as of end-Sept
* Man GLG was founded in 1995
* Key trade: Short unprofitable tech
Ed Cole, managing director of discretionary investments
at Man GLG, believes that eventually, inflation will fall
sharply because earnings will fall and unemployment will rise.
Corners of the market where valuations have run the highest now face the sharpest reversal of fortune, said Cole.
Communications, consumer discretionary stocks (such as fashion brands) and tech companies have posted the best stock price performance against a backdrop of deteriorating earnings expectations, he said. "If you have conviction that inflation will be stubborn, the opportunity for continued multiple contraction is significant, and being short these sectors, particularly in the more speculative parts – the non-profitable parts of tech – is attractive," said Cole. 3/ SCHONFELD STRATEGIC ADVISORS
* Multimanager across several strategies
* Size: $14.2 billion AUM
* Founded in 1988
* Sell interest rate futures
Colin Lancaster, global head of discretionary macro and
fixed income at Schonfeld, favours selling interest rate futures
based on the cost of borrowing in the Secured Overnight
Financing Rate (SOFR), a benchmark interest rate.
Lancaster favours a trade selling long-term borrowing costs
against shorter-term ones, on the view that the spread between
them will decline.
"Concern now for markets is that reacceleration of the economy will lead to higher terminal rates," said Lancaster.
4/ GLOBAL CREDIT ADVISERS
* Founded in 2008
* Over $1 billion
* Key trade: Short high yield credit indices
Brian Hessel, chief risk officer and COO at Global
Credit Advisers, believes the pricing in of higher interest
rates has not reached the riskiest parts of the corporate bond
market.
He favours taking a short position, a bet that an asset
price will weaken, on single name high yield credits or the
indices that track the performance of these companies.
"If a soft landing is not properly engineered, defaults rise
and liquidity events begin to happen, credit spreads will
widen," said Hessel. Hessel says to avoid a short squeeze, the
firm keeps a mixed portfolio of longs and shorts.
5/ THE MERCHANT COMMODITY FUND AT RCMA ASSET MANAGEMENT
* Manages the $300 million Merchant Commodity Fund
* Founded in 2004
* Key trade: Buy 2024/2025 U.S. natural gas futures
Doug King, chief executive officer at RCMA Asset Management, said Europe's mild winter has helped push gas prices down sharply. Energy prices surged after Russia's invasion of Ukraine last year, exacerbating inflation pressures, and forcing a global scramble to look for other sources of natural gas. King believes that in the next few years, the United States, in order to meet its own domestic demand will increase its ability to meet the world's needs.
Buying U.S. long-dated natural gas futures for these reasons and also, he added, "in an inflationary cost/wage environment looks compelling."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Spread between U.S. near and long term rates Tech stock valuations and the broader market Credit spreads yet to widen Natural gas production in the US ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and Toby Chopra)
