K2 Hedge Fund Strategy Outlook: Fourth Quarter 2022

From an investment standpoint, aggressive regime shifts like the current one often create price dislocations as allocators restructure their portfolios, according to K2 Advisors. Read the team’s latest outlook.

Fourth quarter (Q4) 2022 outlook: Summary

The forward paths of inflation and rates are highly uncertain. Global central banks are attempting to quell price pressures with aggressive monetary policy, and regime shifts like the one we are currently experiencing are typically accompanied by major price dislocations. As a result, we prioritize capital preservation until inflation and rates stabilize and, in the meantime, prefer managers that can capture alpha in rapidly shifting environments with nimble portfolios.

Strategy highlights

  1. Discretionary global macro: Macro policy is likely to remain a key factor driving markets for the foreseeable future. Discretionary macro managers should face a compelling opportunity set for implementing directional and relative value themes as well as tactical trading in this environment.
  2. Commodities: Persistent global inflation has led to continued investor interest in commodities. Volatility remains elevated, which should provide a rich potential opportunity set across both relative value and directional trading strategies.
  3. Relative value: Elevated volatility (particularly in the fixed income markets) is presenting a more attractive trading environment for active and relative value trading strategies.

Macro themes we are discussing

The forward direction for various stock, bond, commodity and currency markets during the fourth quarter (and beyond) seems to center around the future level and path of global inflation. The elements causing inflation to be at multi-decade highs are well known. The tricky bit is figuring out the catalysts that will bring price pressures down without causing extensive economic harm.