Will the global economy experience a hard or soft landing, or a rebound?

We need to be careful when talking about the global economy as different regions have been operating at different speeds. For example, China has been particularly sluggish, with the consumer exhibiting pronounced weakness, although the export side of the economy has been more resilient. Europe has suffered from the contagion effect from China, as manufacturing had been reliant on Chinese demand, while consumers are still experiencing the aftermath of the inflationary wave.

The US has demonstrated continued exceptionalism and has topped the league table of the major economic blocks in terms of resilience. While the consensus is for a soft landing, the resurgence of inflation is a growing risk as the new political regime is likely to deploy fiscal stimulus as a key tool and the agenda is decidedly pro-growth.

In our view, the bigger risk for the US is in fact ‘no landing’, with the possibility of inflation overshooting. Interest rates are likely to stay higher for longer, and markets have already priced out a number of rate cuts that had previously been pencilled in for 2025. This could impede a recovery in the US housing market. On balance, however, we still think that the US economy is likely to remain buoyant and would attribute a low probability to a recession at this juncture.

What is the impact of the US election? Is US equity market leadership set to continue?

For the time being, the US is the only show in town, while China and Europe are decidedly out of favour and mired with challenges.

In terms of equity market leadership, technology has been relatively unchallenged at the top of the league table, but this could change if artificial intelligence (AI) hopes disappoint, or should the sector come under pressure from rising bond yields. We could see a broad range of sectors among the future winners, with areas such as domestic cyclicals, financials and small caps playing catch-up. US-dollar strength could also be a drag on technology stocks, as well as negatively affecting the performance of areas such as health care, which tends to be dominated by those companies deriving their earnings from overseas.

Is China investable again? Will stimulus revive the economy?

The Chinese economy has struggled for the last few years on the back of government intervention, which was perceived by markets as unhelpful, as well as distress in the real-estate sector as a result of excessive investment. The Chinese government had not been active on the stimulus front throughout 2023 and in the first half of 2024, but with the announcement of stimulus plans in September, it does seem to have pulled some levers to kick-start the economy.

Although there are tentative signs that the consumer is stabilising, the stimulus currently appears insufficient to engineer a full-blown recovery. We may see some drip-feeding of further stimulus which could be positive at the margin, but the significant structural issues in the real-estate market are unlikely to be resolved overnight.

China enjoys the biggest trade surplus it has ever had, giving rise to pockets of optimism. A potential recovery is, however, difficult to play from an investment perspective, and we have sought to gain exposure to the more positive sentiment on a tactical basis.

AI-related spending: will the investment pay off?

AI has remained a key focus for investors in 2024 and there has been huge excitement around its potential to increase productivity following decades of scant progress on this front. Companies can be more intelligent in the way they manage their businesses in areas such as supply-chain management and identification of consumer trends.

We are now getting to the ‘show me’ phase: considerable investment has been deployed and there is a desire to monetise it. There is a genuine risk that the market has got ahead of itself in terms of expectations, as reflected in lofty price earnings multiples, and there is the potential for a hangover if disappointment ensues. The gold-rush mentality of upping the investment ante has set some companies up for a fall if an increase in demand does not justify the scale of the investment made.

We remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

We continue to have significant investment in this theme in the strategy. Exposure is skewed towards the ‘picks and shovels’ through semiconductor names. While we believe in the long-term trend, we are mindful that we could see some pullbacks along the way. We also remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

Do you see fixed income returning to its role as a diversifier?

Bonds will have a role, but they are unlikely to be as dominant as they have been in the past.

Bonds have typically acted as a ‘flight-to-safety’ asset, as well as cushioning against growth shocks. They have also had the benefit of positive carry (when the benefit of holding the asset exceeds the costs). As a result of the more inflationary environment inherent in this new market regime where fiscal policy plays a more dominant role, bonds may no longer be as consistent a hedging tool and there will be a need to further diversify. The new regime appears more fragile, and the shocks of tomorrow are likely to look very different in terms of frequency, intensity, origin and their ability to spread across the system.

A portfolio’s ‘stabilising’ assets will need to be different from those used previously and could include alternative risk premia and other alternative return streams. In our view, the fact that bond insurance appeared to be ‘free’ was an anomaly, and a product of the distorted policy regime that allowed yield curves to steepen.

What is the outlook for commodities – gold/silver/oil/copper?

Gold seems to have got ahead of itself, sensing that expansionary fiscal policy was on the cards with a likely Trump victory in the US presidential election. We still like gold and consider it to be a useful diversifier, but we have reduced exposure for the time being.

We are selective about the weighting to commodities, mindful that a strong US dollar in the short-term will not be a positive for the commodity complex. Copper is an area that we still favour, as it is a beneficiary of the green transition, playing into the electric-vehicle theme, as well as being used for data centres, a key element of the AI build-out.

Elsewhere, silver is a precious metal that we like, owing to the attraction of both its industrial use and the fact that it is playing catch-up with gold from a valuation perspective. It is, however, a higher-beta commodity and does not have the same safe-haven attributes as gold. We have reduced the strategy’s oil exposure on the equity front in the expectation that the new US administration will encourage a higher level of drilling activity or may even lean on OPEC to increase supply.

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

Will the global economy experience a hard or soft landing, or a rebound?

We need to be careful when talking about the global economy as different regions have been operating at different speeds. For example, China has been particularly sluggish, with the consumer exhibiting pronounced weakness, although the export side of the economy has been more resilient. Europe has suffered from the contagion effect from China, as manufacturing had been reliant on Chinese demand, while consumers are still experiencing the aftermath of the inflationary wave.

The US has demonstrated continued exceptionalism and has topped the league table of the major economic blocks in terms of resilience. While the consensus is for a soft landing, the resurgence of inflation is a growing risk as the new political regime is likely to deploy fiscal stimulus as a key tool and the agenda is decidedly pro-growth.

In our view, the bigger risk for the US is in fact ‘no landing,’ with the possibility of inflation overshooting. Interest rates are likely to stay higher for longer, and markets have already priced out a number of rate cuts that had previously been penciled in for 2025. This could impede a recovery in the US housing market. On balance, however, we still think that the US economy is likely to remain buoyant and would attribute a low probability to a recession at this juncture.

What is the impact of the US election? Is US equity market leadership set to continue?

For the time being, the US is the only show in town, while China and Europe are decidedly out of favor and mired with challenges.

In terms of equity market leadership, technology has been relatively unchallenged at the top of the league table, but this could change if artificial intelligence (AI) hopes disappoint, or should the sector come under pressure from rising bond yields. We could see a broad range of sectors among the future winners, with areas such as domestic cyclicals, financials and small caps playing catch-up. US-dollar strength could also be a drag on technology stocks, as well as negatively affect the performance of areas such as health care, which tends to be dominated by those companies deriving their earnings from overseas.

Is China investable again? Will stimulus revive the economy?

The Chinese economy has struggled for the last few years owing to government intervention, which was perceived by markets as unhelpful, as well as distress in the real-estate sector as a result of excessive investment. The Chinese government had not been active on the stimulus front throughout 2023 and in the first half of 2024, but with the announcement of stimulus plans in September, it does seem to have pulled some levers to kick-start the economy.

Although there are tentative signs that the consumer is stabilizing, the stimulus currently appears insufficient to engineer a full-blown recovery. We may see some drip-feeding of further stimulus which could be positive at the margin, but the significant structural issues in the real-estate market are unlikely to be resolved overnight.

China enjoys the biggest trade surplus it has ever had, giving rise to pockets of optimism. A potential recovery is, however, difficult to play from an investment perspective, and we have sought to gain exposure to the more positive sentiment on a tactical basis.

AI-related spending: will the investment pay off?

AI has remained a key focus for investors in 2024 and there has been huge excitement around its potential to increase productivity following decades of scant progress on this front. Companies can be more intelligent in the way they manage their businesses in areas such as supply-chain management and identification of consumer trends.

We are now getting to the ‘show me’ phase: considerable investment has been deployed and there is a desire to monetize it. There is a genuine risk that the market has got ahead of itself in terms of expectations, as reflected in lofty price earnings multiples, and there is the potential for a hangover if disappointment ensues. The gold-rush mentality of upping the investment ante has set some companies up for a fall if an increase in demand does not justify the scale of the investment made.

We remain alert to the broadening out of the AI trend, and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

We continue to have significant investment in this theme in the strategy. Exposure is skewed toward the ‘picks and shovels’ through semiconductor names. While we believe in the long-term trend, we are mindful that we could see some pullbacks along the way. We also remain alert to the broadening out of the AI trend, and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

Do you see fixed income returning to its role as a diversifier?

Bonds will have a role, but they are unlikely to be as dominant as they have been in the past.

Bonds have typically acted as a ‘flight-to-safety’ asset, as well as cushioning against growth shocks. They have also had the benefit of positive carry (when the benefit of holding the asset exceeds the costs). As a result of the more inflationary environment inherent in this new market regime where fiscal policy plays a more dominant role, bonds may no longer be as consistent a hedging tool, and there will be a need to further diversify. The new regime appears more fragile, and the shocks of tomorrow are likely to look very different in terms of frequency, intensity, origin and their ability to spread across the system.

A portfolio’s ‘stabilizing’ assets will need to be different from those used previously and could include alternative risk premia and other alternative return streams. In our view, the fact that bond insurance appeared to be ‘free’ was an anomaly and a product of the distorted policy regime that allowed yield curves to steepen.

What is the outlook for commodities – gold/silver/oil/copper?

Gold seems to have got ahead of itself, sensing that expansionary fiscal policy was on the cards with a likely Trump victory in the US presidential election. We still like gold and consider it to be a useful diversifier, but we have reduced exposure for the time being.

We are selective about the weighting to commodities, mindful that a strong US dollar in the short-term will not be a positive for the commodity complex. Copper is an area that we still favor, as it is a beneficiary of the green transition, playing into the electric-vehicle theme, as well as being used for data centers, a key element of the AI build-out.

Elsewhere, silver is a precious metal that we like, owing to the attraction of both its industrial use and the fact that it is playing catch-up with gold from a valuation perspective. It is, however, a higher-beta commodity and does not have the same safe-haven attributes as gold. We have reduced the strategy’s oil exposure on the equity front in the expectation that the new US administration will encourage a higher level of drilling activity or may even lean on the Organization of the Petroleum Exporting Countries (OPEC) to increase supply.

Will the global economy experience a hard or soft landing, or a rebound?

We need to be careful when talking about the global economy as different regions have been operating at different speeds. For example, China has been particularly sluggish, with the consumer exhibiting pronounced weakness, although the export side of the economy has been more resilient. Europe has suffered from the contagion effect from China, as manufacturing had been reliant on Chinese demand, while consumers are still experiencing the aftermath of the inflationary wave.

The US has demonstrated continued exceptionalism and has topped the league table of the major economic blocks in terms of resilience. While the consensus is for a soft landing, the resurgence of inflation is a growing risk as the new political regime is likely to deploy fiscal stimulus as a key tool and the agenda is decidedly pro-growth.

In our view, the bigger risk for the US is in fact ‘no landing’, with the possibility of inflation overshooting. Interest rates are likely to stay higher for longer, and markets have already priced out a number of rate cuts that had previously been pencilled in for 2025. This could impede a recovery in the US housing market. On balance, however, we still think that the US economy is likely to remain buoyant and would attribute a low probability to a recession at this juncture.

What is the impact of the US election? Is US equity market leadership set to continue?

For the time being, the US is the only show in town, while China and Europe are decidedly out of favour and mired with challenges.

In terms of equity market leadership, technology has been relatively unchallenged at the top of the league table, but this could change if artificial intelligence (AI) hopes disappoint, or should the sector come under pressure from rising bond yields. We could see a broad range of sectors among the future winners, with areas such as domestic cyclicals, financials and small caps playing catch-up. US-dollar strength could also be a drag on technology stocks, as well as negatively affecting the performance of areas such as health care, which tends to be dominated by those companies deriving their earnings from overseas.

Is China investable again? Will stimulus revive the economy?

The Chinese economy has struggled for the last few years on the back of government intervention, which was perceived by markets as unhelpful, as well as distress in the real-estate sector as a result of excessive investment. The Chinese government had not been active on the stimulus front throughout 2023 and in the first half of 2024, but with the announcement of stimulus plans in September, it does seem to have pulled some levers to kick-start the economy.

Although there are tentative signs that the consumer is stabilising, the stimulus currently appears insufficient to engineer a full-blown recovery. We may see some drip-feeding of further stimulus which could be positive at the margin, but the significant structural issues in the real-estate market are unlikely to be resolved overnight.

China enjoys the biggest trade surplus it has ever had, giving rise to pockets of optimism. A potential recovery is, however, difficult to play from an investment perspective, and we have sought to gain exposure to the more positive sentiment on a tactical basis.

AI-related spending: will the investment pay off?

AI has remained a key focus for investors in 2024 and there has been huge excitement around its potential to increase productivity following decades of scant progress on this front. Companies can be more intelligent in the way they manage their businesses in areas such as supply-chain management and identification of consumer trends.

We are now getting to the ‘show me’ phase: considerable investment has been deployed and there is a desire to monetise it. There is a genuine risk that the market has got ahead of itself in terms of expectations, as reflected in lofty price earnings multiples, and there is the potential for a hangover if disappointment ensues. The gold-rush mentality of upping the investment ante has set some companies up for a fall if an increase in demand does not justify the scale of the investment made.

We remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

We continue to have significant investment in this theme in the strategy. Exposure is skewed towards the ‘picks and shovels’ through semiconductor names. While we believe in the long-term trend, we are mindful that we could see some pullbacks along the way. We also remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

Do you see fixed income returning to its role as a diversifier?

Bonds will have a role, but they are unlikely to be as dominant as they have been in the past.

Bonds have typically acted as a ‘flight-to-safety’ asset, as well as cushioning against growth shocks. They have also had the benefit of positive carry (when the benefit of holding the asset exceeds the costs). As a result of the more inflationary environment inherent in this new market regime where fiscal policy plays a more dominant role, bonds may no longer be as consistent a hedging tool and there will be a need to further diversify. The new regime appears more fragile, and the shocks of tomorrow are likely to look very different in terms of frequency, intensity, origin and their ability to spread across the system.

A portfolio’s ‘stabilising’ assets will need to be different from those used previously and could include alternative risk premia and other alternative return streams. In our view, the fact that bond insurance appeared to be ‘free’ was an anomaly, and a product of the distorted policy regime that allowed yield curves to steepen.

What is the outlook for commodities – gold/silver/oil/copper?

Gold seems to have got ahead of itself, sensing that expansionary fiscal policy was on the cards with a likely Trump victory in the US presidential election. We still like gold and consider it to be a useful diversifier, but we have reduced exposure for the time being.

We are selective about the weighting to commodities, mindful that a strong US dollar in the short-term will not be a positive for the commodity complex. Copper is an area that we still favour, as it is a beneficiary of the green transition, playing into the electric-vehicle theme, as well as being used for data centres, a key element of the AI build-out.

Elsewhere, silver is a precious metal that we like, owing to the attraction of both its industrial use and the fact that it is playing catch-up with gold from a valuation perspective. It is, however, a higher-beta commodity and does not have the same safe-haven attributes as gold. We have reduced the strategy’s oil exposure on the equity front in the expectation that the new US administration will encourage a higher level of drilling activity or may even lean on OPEC to increase supply.

With UK politics now firmly settled upon a new course, we note that over half the entire global population will have a similar opportunity in choosing its future political leaders this year. Electorates in many countries are growing tired of established party policies, opening the door for populists to gain a share of power with promises of easy fixes for complex problems.

Just as election results may well change many lives this year, they could also prove consequential for investors in areas such as fiscal and monetary policy, inflation, international trade and broader geopolitical relations.   

Interpreting the macroeconomics is key

As a mixed-assets portfolio manager, it is critical to identify and try to understand how these factors may affect different asset classes. In the short term, the impact of most elections is highly unpredictable, as manifesto promises can often evaporate after polling day. As a result, we focus on the fundamental and longer-term drivers which can often be far more significant. These drivers can clearly be shaken by political shocks, so we believe it makes sense for investors to harness the flexibility and adaptability of mixed-asset strategies that can identify opportunities in the face of such uncertainty.

US dominance

Around 60% of global equity markets, by value, are listed in the US. The US economy also makes up around 25% of global GDP, so it is understandable that its elections have the potential for outsized influence on investment portfolios. In many important aspects, however, such as fiscal positions or geopolitical considerations, the outcome of the US presidential election in November this year is unlikely to result in many significant changes, even though the candidates differ in their approach to areas such as immigration, Russia’s invasion of Ukraine, or energy policy. More importantly, the scale and dominance of US equity markets over recent years is the result of generous returns sustained by an era of loose monetary policy and a reassurance that authorities would be likely to intervene to smooth out the worst impact of a sharp downturn in economic activity.

US debt burden

After several years of support, the US now has an unenviable debt burden of more than 121% of GDP. Pandemic aside, this is almost double the level of the previous cyclical peak in the mid-1990s (around 65%). The outlook is also uncertain, with an ageing population likely to place a compounding burden on key welfare costs. We expect these costs to far exceed economic growth and tax revenues. One key US medical provider said recently that it expects health care to account for an additional 2% of US GDP annually by 2044. 

Many might argue that this does not matter too much because the US dollar remains the dominant global currency of trade and wealth. To date, those who want to trade with the largest consumer economy globally have had little choice but to accept payment in US dollars. They would then also have little alternative but to invest their dollar profits in US assets (US government bonds and stocks).

US dollar hegemony under threat?

This is a circularity that has supported the US currency, market valuations and ever-increasing public debt for decades. However, the dollar’s hegemony appears to be under threat as other global powers take an increasingly political stance, often at odds with the US’s own foreign policy. The huge scale and increase in wealth of China and India’s middle classes suggest there are now alternative consumer markets for manufacturers to pursue. The emerging economies of two decades ago are now economic powerhouses in their own right and increasingly asserting their stature as new global trading patterns emerge. 

While the US remains the pre-eminent global economy and leads the world in technological development, threats to its global dominance are emerging thanks to the trifecta of political change, indebtedness and competitionbetween global powers, as identified by our big government, financialisation and great power competition investment themes.

What does this mean for mixed-asset portfolios?

It is tempting to view higher bond yields (combined with easing inflation) as offering an attractive invitation to invest more in the asset class. However, higher yields can also reflect renewed recognition of the future risk that investors face as the scale of the debt burden comes home to roost. For us, this is a longer-term issue. In the meantime, we believe the higher yield on offer from bonds means there may be opportunities to use them as a tactical risk hedge in volatile markets.

In equities, meanwhile, the US market has become narrowly led by a handful of mega-cap stocks, with ten firms comprising 30% of the S&P 500 index. This is largely thanks to enthusiasm for artificial intelligence, which has the potential to be truly transformative both to existing processes and new innovative possibilities. However, as always, it is important to retain perspective when constructing a mixed-asset investment portfolio, and to try to maintain exposure to transformational trends. We believe this must be considered as part of a further diversification of assets and we remain cognisant that such material tailwinds can fade over time.

All this points to why we believe it makes sense for investors to consider a global mandate, which enables asset managers to pursue opportunities without being tied to asset class or index constraints. Newton’s multidimensional research team identifies and monitors the thematic drivers that shape markets and the outlook for individual firms to identify compelling opportunities, irrespective of location.    

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

The market environment following 2008’s global financial crisis was characterised by an abundance of liquidity, effectively zero cash rates and negative correlation between stocks and bonds. With investors sensing that the central-bank ‘put’ was firmly in place to underpin markets, risky assets moved inexorably higher. Waves of central-bank quantitative easing (QE) created an inherent fragility in financial markets, with the abundant liquidity driving asset prices higher and rendering relative-value strategies less effective.

In 2020, the Covid-19 pandemic created such turbulence that inflation surged. Cash rates rose to more than 5%, eroding risk premiums and setting a high hurdle for risky assets. Traditional hedges such as government bonds did not provide diversification.

New regime, new challenges

This drastic change created new challenges for client portfolios. Not only did diversification diminish as correlations between asset classes became less negative or outright positive, but inflation became a risk, particularly given its uncertain trajectory. Moreover, the shift into private-market strategies during the QE era created an unintentional bias towards illiquid assets. Furthermore, high cash rates mean the net present value of long-term cash flows is now lower than during the period of QE.

Is your portfolio prepared for this new regime? Questions and uncertainty abound.

• Will the same portfolio succeed in this very different market environment?
• How should we navigate this new, less synchronous market regime?
• How should portfolios adjust to compete with a high cash rate and lower risk premiums?
• Has your portfolio compensated for the fact that bonds are now less diversifying?

One attractive solution is to use market-neutral, relative-value strategies, whose long/short structure is immune to funding costs and can offer a return stream that is uncorrelated with directional, beta strategies. These strategies are also ideally placed to exploit the richer opportunity set from the post-Covid regime of greater dispersion and heightened volatility, and are less reliant on the direction of asset-class prices owing to their flexible, long/short nature. Furthermore, a set of measures informing long/short decisions – including carry, value, and macro fundamentals – can quickly adapt to changing conditions and provide diversification.

Alpha diversification opportunities

Greater dispersion across asset classes can provide attractive alpha opportunities for both long and short positions. In our view, alpha diversification is more reliable across various macro regimes than beta diversification, making relative-value decisions more resilient to macro shocks. Of course, they are not immune to idiosyncratic shocks within an asset class, but it is our expectation that any such shocks are likely to be contained and not affect relative-value opportunities in other asset classes.

Another advantage of relative-value strategies is that they can be implemented in a cash-efficient manner through highly liquid derivatives that are listed and traded on exchanges. Long and short exposures can also be achieved in synthetic form through a total-return swap. These relative-value strategies also allow investors to ‘port’ the alpha streams on top of the cash used to collateralise the derivative exposures, thereby benefiting from higher cash rates.

Recipe for a well-constructed portfolio

In summary, markets and trading instruments have evolved considerably in recent years, offering enhanced liquidity, greater capital efficiency and higher capacity. Diversified relative-value alpha streams, implemented through derivatives, can help investors adapt to this new market regime by providing attractive and scalable risk-adjusted return potential with market-neutral implementation. Instead of viewing higher cash rates as a hurdle, harnessing strategies that work with cash rather than against cash makes sense, particularly in the context of a new regime where cash rates are more elevated. Deploying the right instruments in the right context with the right intent is, in fact, a recipe for a well-constructed portfolio which we believe can weather this new, more challenging market regime.

The market environment following 2008’s global financial crisis was characterized by an abundance of liquidity, effectively zero cash rates and negative correlation between stocks and bonds. With investors sensing that the central-bank ‘put’ was firmly in place to underpin markets, risky assets moved inexorably higher. Waves of central-bank quantitative easing (QE) created an inherent fragility in financial markets, with the abundant liquidity driving asset prices higher and rendering relative-value strategies less effective.

In 2020, the Covid-19 pandemic created such turbulence that inflation surged. Cash rates rose to more than 5%, eroding risk premiums and setting a high hurdle for risky assets. Traditional hedges such as government bonds did not provide diversification.

New Regime, New Challenges

This drastic change created new challenges for client portfolios. Not only did diversification diminish as correlations between asset classes became less negative or outright positive, but inflation became a risk, particularly given its uncertain trajectory. Moreover, the shift into private-market strategies during the QE era created an unintentional bias towards illiquid assets. Furthermore, high cash rates mean the net present value of long-term cash flows is now lower than during the period of QE.

Is your portfolio prepared for this new regime? Questions and uncertainty abound.

• Will the same portfolio succeed in this very different market environment?
• How should we navigate this new, less synchronous market regime?
• How should portfolios adjust to compete with a high cash rate and lower risk premiums?
• Has your portfolio compensated for the fact that bonds are now less diversifying?

One attractive solution is to use market-neutral, relative-value strategies, whose long/short structure is immune to funding costs and can offer a return stream that is uncorrelated with directional, beta strategies. These strategies are also ideally placed to exploit the richer opportunity set from the post-Covid regime of greater dispersion and heightened volatility, and are less reliant on the direction of asset-class prices owing to their flexible, long/short nature. Further, a set of measures informing long/short decisions—including carry, value, and macro fundamentals—can quickly adapt to changing conditions and provide diversification.

Alpha Diversification Opportunities

Greater dispersion across asset classes can provide attractive alpha opportunities for both long and short positions. In our view, alpha diversification is more reliable across various macro regimes than beta diversification, making relative-value decisions more resilient to macro shocks. Of course, they are not immune to idiosyncratic shocks within an asset class, but it is our expectation that any such shocks are likely to be contained and not affect relative-value opportunities in other asset classes.

Another advantage of relative-value strategies is that they can be implemented in a cash-efficient manner through highly liquid derivatives that are listed and traded on exchanges. Long and short exposures can also be achieved in synthetic form through a total-return swap. These relative-value strategies also allow investors to ‘port’ the alpha streams on top of the cash used to collateralize the derivative exposures, thereby benefiting from higher cash rates.

Recipe for a Well-Constructed Portfolio

In summary, markets and trading instruments have evolved considerably in recent years, offering enhanced liquidity, greater capital efficiency and higher capacity. Diversified relative-value alpha streams, implemented through derivatives, can help investors adapt to this new market regime by providing attractive and scalable risk-adjusted return potential with market-neutral implementation. Instead of viewing higher cash rates as a hurdle, harnessing strategies that work with cash rather than against cash makes sense, particularly in the context of a new regime where cash rates are more elevated. Deploying the right instruments in the right context with the right intent is, in fact, a recipe for a well-constructed portfolio which we believe can weather this new, more challenging market regime.