AIF 2022 - Interview #1: Together again in a new world

Buoyed by strong returns last year, investors started 2022 with a positive outlook, despite clear expectations of rising volatility. But with inflation looking more persistent than expected, the war in Ukraine continuing to ripple, and the impact of Covid-19 lingering, investors are turning to alternative asset classes to hedge against these risks and seek uncorrelated sources of return.

In a report, consultancy Mercer gives an overview of the current situation: “Inflation has spiked…In parallel, the drivers of disinflation that have been ever present over the last half century are being challenged… As a result, though financial markets have seen stellar performance, investors should consider ensuring their portfolios are resilient to inflationary scenarios going forward."

This is the backdrop to the 2022 Amsterdam Investor Forum (AIF). The world has shifted on its axis since the last in-person AIF in 2019. Industry experts now welcome the opportunity to meet face-to-face and discuss recent changes and events, as well as the risks and opportunities in the market.

The conference agenda is centred around four main pillars, namely industry, innovation, investors and inflation. The panel sessions will be tackling these topics from diverse angles and viewpoints. As ABN AMRO Clearing Bank’s Global Head of Prime, Delphine Amzallag, comments: “Inflation is the dominant market theme at present and this will likely persist; we’ve also witnessed accelerated innovation both in terms of alternative strategies expanding their trading universe to include commodities like carbon credits, and also the proliferation of digital assets and broader tokenisation. These are just a few of the many challenges and opportunities facing the hedge fund industry and investors."

Over the past 12 months, the global economic outlook has changed dramatically. A world in which US-China relations held the limelight has been overshadowed by the war in Ukraine, which, in addition to its devastating human impact, is having various consequences all across Europe.

“The Russian / Ukraine war has no doubt magnified the slowdown in the global economy. The supply chain disruptions that began during the Covid pandemic have been prolonged and intensified by the conflict. And with China only recently lifting its latest lockdown, the specter of Covid has not disappeared. With much of Europe facing an energy and cost of living crisis, the threat of recession looms large,” notes Amzallag.

This means the concerns of AIF attendees this year are likely to be overshadowed by a myriad of events, including apprehension around interest rates, persistent inflation, rising cost of living expenses and general uncertainty. In 2020, AIF attendees were mainly concerned about cybercrime and geo-political instability in the Middle East. While these issues are still on many market participants’ minds, they may have slipped down their list of priorities this year.

The global economic outlook and its repercussions on investment allocations will be discussed in the opening panel of the main AIF event on September 21, 2022. As ABN AMRO’s Amzallag explains: “2022 is shaping up to be a tough year so what does this mean for markets going forward? The deep scars on government debt, the bloated central bank balance sheets, the war induced commodity price increases as well as other economic pressure will dominate discussions on the day."

Energy market opportunities

One of the consequences of the Ukraine war is the renewed drive for countries to be energy independent. In the wake of the crisis, the European Commission proposed the outlines of a plan to make Europe independent from Russian fossil fuels well before 2030.

“The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system,” said Commission President Ursula von der Leyen when announcing the plan called REPowerEU.

Several alternative asset managers have outlined the potential opportunities in the renewable energy space arising from the current situation. Many have also launched funds focused on this theme, meaning the growth potential in this area is significant.

“Across 2022, there has been a shift in the energy investment landscape – we’ve witnessed pronounced volatility in a number of commodities and a decoupling of traditional correlations. We’ve also seen considerable interest amongst our hedge fund clients in carbon; a market that is relatively nascent and due to its structural inefficiencies is ripe with opportunity,” observes Amzallag.

These topics will be discussed at the AIF by commodity specialists who have dedicated their careers to responding to the energy challenge in innovative ways. “We’re delighted to welcome panellists from across the sector with very different investment approaches and views on current market dynamics, it’ll be a lively debate”.

In keeping with the surge in renewable energy investment opportunities, the theme of sustainability and ESG has emerged with additional vigour. Investors anticipated this trend as sustainable investing was highlighted as the biggest structural theme at the 2020 AIF.

Since then, ESG and sustainability has only grown in significance, with strategies gaining greater traction, more investors expressing the desire to allocate to such assets and regulators doubling down on related reporting and disclosures.

Hedge fund outlook

As a result of the macro-economic background, market volatility is expected to persist. Although this brings with it a certain level of risk, it also affords alternative asset managers ample opportunity to generate returns.

The tumult has led to quantitative, trend-following CTA strategies posting record gains. In an article, Leda Braga, founder of Systematica Investments said: “Now is one of those 2008 moments where everyone [in trend-following] is doing well again. The trends are clearer.” Hedge funds’ appeal with investors has been known to wax and wane, though the ultimate benefits they provide continue to hold true.

The AIMA Hedge Fund Confidence Index for Q1 2022 finds, “Confidence levels reported by hedge funds remains resilient despite a number of prevailing headwinds impacting the global economy”. Within the strategies polled, global macro (+19) and multistrategy (+18) reported the highest confidence scores.

At this year’s AIF, experts in the industry will be outlining current investor sentiment towards hedge funds and the factors which are influencing these attitudes. As Amzallag notes: “Inflationary pressures and the threat of recession across many economies complicates the hunt for yield and renews the importance of capital protection. We’ve already seen the resurgence of CTAs and greater appetite for niche, uncorrelated strategies so it’ll be interesting to understand how investors are looking to position their portfolios against this increasingly dour market backdrop."

A Renaissance

As both Braga and Amzallag note, investments which are less dependent on the upside have benefitted from recent dislocations. An article by Reuters details that the SG Trend Index, which tracks the daily rate of return for a pool of CTAs, is up about 25.6% from the beginning of the year to the end of May. This was its best performance since the data had started being recorded in 2000.

This hunger for truly diversifying, alternatives sources of return has also seen the renewed interest in volatility as an asset class in and of itself.

A paper by James Doran, Volatility as an Asset Class: Holding VIX in a Portfolio illustrates the feasibility and effectiveness of attempting to use volatility to avoid market shortfalls by hedging downside risk. “Since the current asymmetric relationship between the VIX index and the S&P 500 generates the strongest negative correlations when the market is falling, holding the VIX is a natural candidate for hedging market risk,” Doran outlines.

To this, ABN AMRO’s Amzallag adds that, “in exploiting many different arbitrage opportunities, volatility focused hedge funds can provide more nuanced protection. They are also typically agnostic of market direction and so have earned their permanent place in investors’ portfolios.

We’ve therefore elected to dedicate a panel to volatility as both a strategy and asset class this year – it’s certainly front and centre at the moment."

Cryptocurrencies and digital assets are another asset class which is whetting investors’ appetite for new innovative hedge solutions. As allocators seek creative ways of mitigating risks and diversifying their opportunity set, the appeal of these investment strategies continues to rise.

However, the spectacular crash witnessed in cryptocurrencies during the first six months of 2022 provides ample room for discussion over the future of these investments. Derek Thompson, a writer at The Atlantic, believes the crypto bubble pop, when seen in the context of other signals, could foreshadow a US recession. Other industry experts are less alarmed.

AIF panellists will analyse these new developments and argue whether these innovations are creating new bubbles or asset classes which could become part of the investing landscape long term.

A high calibre event

The AIF has a reputation for featuring high calibre speakers with specialist market knowledge. Amzallag says the forum offers attendees the opportunity to navigate a more intimate environment with these subject matter experts. “It is a very personalised event which allows for many networking opportunities in a professional, yet comfortable setting.

“It is a truly global conference as people fly in from all over the world to attend. It offers industry professionals the chance to understand the ever-changing market and the opportunities available as well as connect face-to-face with their peers and clients,” she adds.

Professionals interested in attending the 2022 AIF can register here.

This article was originally featured in Hedgeweek