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eVestment Hedge Fund Asset Flow Report found 42 percent of the managers were able to raise new capital in the last year, many fund managers declared the year to be the most challenging, and overall the winners in the year were the Market Neutral Equity Funds, where investors added $12.52b during the year.
The other top performing strategies included the Macro funds ($6.74 b) and the MBS strategies ($8.01b). Market neutral strategies make use of arbitrates which can benefit from long positions with short positions.
The goal is to get a market-neutral - where the correlation approach between the long and short, helps in determining their positions. Such strategies generate profits that are primarily based on the price movement of the stocks. Equity market neutrality is useful as a defensive tool when the market is hit by harsh reversals.
The fourth quarter of the year 2018 was marked by enormous volatility, which could be a great thing for long/short fundamental strategies.
The slowing global growth, inflation, and High yield corporate may come under pressure in cyclical industries, where experts expect the cycle to remain peculiar due to the flexibility afforded to the companies in borrowing in the loan markets.
China’s growth has been hit by trade negotiations with the US, and the Brexit deal may prove to be an issue for the UK, while, the US is renegotiating trade deals with partners, creating unpredictability in the global trade supply chains.
Some believe the year 2019 may have several catalysts for volatility where credit indices imply the default rate to be at 3.3 percent for the US high yield companies.
These are the situations when the global macroeconomic environment is full of risk catalysts like economic slowdown, cold war or Brexit.
In the current market, one of the biggest risks is the violent market reversals. The correlation between High Yield bonds and S&P 500 can be used to measure the market sentiments and get the risk on/ risk off–forecaster of volatility.
Some believe the tremors of October and December were just a warning sign that could intensify in the current year or the next year.
When the trend line breaks, it indicates the potential future moves up or downs, and it has been used as a predictor earlier but in February the trend line broke and the market continued to show an uptrend, which has been considered as a troubling sign by many analysts.
Some aggressive trends in the market may be introduced in 2019 with higher bond evaluation where the equity market neutral can serve as middle ground with the Marco- tail risk.
Global macro investment is, sometimes, linked to long volatility strategies, which can incorporate the tail risk protection to promote diversification and downside protection.
At the time of higher volatility, the weather funds gain popularity, which includes the long/short positions allowing the buyers to purchase the investment, which they perceive as advantages and they may sell depreciating short securities.
Whether funds can take long positions and short depending on changes in the market conditions.
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