Hedge funds bet on recovery in 2021

[TORONTO] Some global hedge fund investors are going into 2021 optimistic about a speedy snap-back from the economic challenges related to the coronavirus pandemic.

Hedge funds, which use leverage and employ more aggressive, often riskier strategies than other investors, believe many previously undesirable sectors, ranging from energy to retail, will rebound in 2021.

Accounting for roughly US$3 trillion in assets, hedge funds showed resilience in 2020, with many outperforming the market, according to investors.

"We think 2021 is going to be a really positive year for the markets," said Jason Donville, president and chief executive officer at Toronto-based hedge fund Donville Kent Asset Management. He forecasts an explosion of pent-up demand for travel and leisure producing a period of "super growth".

"I think it will take a little while for the vaccines to roll out and then somewhere around March, April, May, you're going to get a confluence of the vaccines getting to a certain critical mass... and infection rates dropping."

For 2020 as a whole, the S&P 500 unofficially rose 16.26 per cent, a stunning rally from a bear market that kicked off when the pandemic spread rapidly earlier in the year.

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"What I would say about 2021 is it looks like it's going to be a year of recovery," said Robert Sears, chief investment officer at UK-based Capital Generation Partners, which invests in hedge funds globally. "That's the consensus view."

The gainers in 2020 included the S&P 500 Information Technology Sector, up more than 42 per cent as the sector benefited from the abrupt acceleration of online trends. On the other hand, the S&P 500 Hotels Restaurants and Leisure eeked out a gain of 1.4 per cent.

In the past quarter, however, leisure stocks have rebounded as vaccine rollouts have accelerated hopes of recovery.

"I think macro conditions are going to continue to be quite volatile, so macro should have a good year," said Mr Sears, referring to funds that invest according to macroeconomic trends.

He added that funds that specialise in currencies and commodities should do well.

Jack McIntyre, a portfolio manager at US$62 billion US firm Brandywine Global, which runs a macro hedge fund strategy, said there will be "less uncertainty and more certainty" in the new year.

Financials are a sector that has been challenged by coronavirus and could be supported by a recovery, said Philippe Ferreira at Paris-based fund of hedge fund Lyxor Asset Management, adding that the sector typically performs better in the initial stage of a recovery.

"Managers are easing the short bias towards financials because we are entering a recovery," said Mr Ferreira, whose firm invests in hedge funds globally.

The S&P Financial Index fell around 4.3 per cent in 2020 despite rebounding in the fourth quarter.

"On the macro side, managers say that with rates so low, they are diversifying fixed income with inflation and especially on the US side and gold," said Mr Ferreira.

North American energy is another beaten-down sector popular with hedge funds, market participants said. The Canadian Energy Sector Index lost 37.8 per cent over the entirety of 2020 while a comparable index for the US fell 37.3 per cent.

"Anything in energy... all of that is a Covid recovery play to the extent the demand for fuel goes up, people start going back to the office more," said one Canadian hedge fund manager.

"We're adding the names like AltaGas, Pembina and Canadian Natural Resources and we've been a buyer since post-the US election."

AltaGas stock plummeted 60 per cent in March and is down 5.1 per cent for the year through Dec 31. Shares in Pembina and Canadian Natural Gas fell 61.3 per cent and 27.3 per cent, respectively, over 2020.

"I would say that energy consumption is going to make a very healthy recovery and probably continue on an above-historical year-on-year level," said Jay Tatum, portfolio manager at New York-based metals-focused Valent Asset Management. He added that oil was only one source of energy that would see growth.

REUTERS