A global depression caused by a trade war. An overhaul of health care. Rising inflation and deregulation.
To find out what hedge fund managers are looking out for in 2017, we asked several who topped Bloomberg’s 2016 global ranking of the 50 best-performing hedge funds with more than $1 billion in assets. After riding a jump in equities, oil and high-yield debt in the past year, some of the managers see more opportunity in commodities, energy and corporate debt.
“You’re going to have to take way more risk today in order to try to make outsize gains versus a year ago,” said Hanif Mamdani, who runs the PH&N Absolute Return Fund at the Royal Bank of Canada. “You try to eke out a 6, 7, 8 percent return and wait for an eventual dislocation -- whether it’s because of the Fed, or a tweet.”
Here are some of the bets for this year by top-ranked managers, whose firms focus on three different strategies:
Event-Driven/Distressed
Hedge funds specializing in distressed assets saw their energy-related investments soar along with oil prices last year. Even so, managers see the potential for more profits in the sector this year, particularly in equities.
• Jason Mudrick manages the Mudrick Distressed Opportunity Fund, which led the ranking with a 38.7 percent gain.
“There is still an opportunity in commodity-related credits due to the discrepancy between private distressed credit-market valuations and public equity-market valuations,” Mudrick said in a Jan. 19 letter to investors. “This valuation discrepancy dissipates as these companies convert debt to equity and move past their restructurings.” He’s also analyzing distressed opportunities in retail, health care, media and technology.
• Bill Raine co-manages the Contrarian Capital Fund I, which placed eighth.
“There are a number of companies that have restructured that have potential for strong returns in the equity,” Raine said of energy companies in an interview. “Now that they have stronger balance sheets, they’ll start drilling again, and some are drilling in very, very attractive basins."
His firm has also been studying hospitals and pharmaceutical companies that would be affected by sweeping changes to the Affordable Care Act. “We’re reasonably sure there will be winners and losers, not just the hospitals but a lot of parts of health care that have probably benefited from this uptick in insured population,” he said.
Another source of turmoil would be a border adjustment tax, which targets imports and would hit retailers and oil refiners that process imported crude, he said.