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#GAIM2015: Spectre of rising interest rates haunting markets

First Published 23rd June 2015

Hedge funds and investors debated over strategy against a backdrop of uncertainty over how markets will react when interest rates rise in developed markets.

Delegates at GAIM conference

Delegates at GAIM conference

GAIM conference runs from 22 to 24 June

Monaco - The interest rate environment and its impact on portfolios was a major focus for hedge funds and investors at this year's GAIM conference. Automated Trader brings you comments from around the conference.

Panel: Lower for how much longer?

Chuck Clough, chairman and chief executive, Clough Capital Partners

"We're left with, I think, the Western economy where nominal interest rates are going to remain at very low levels for a long, long, long, long, long, long, long, long, long, long time…it obviously means fixed incomes will remain low. It does artificially depress the cost of capital, and in a number of economies that's kept zombie companies alive…(but) I don't think that capital can be used carelessly like it has in past cycles."

Roy Niederhoffer, president, RG Niederhoffer

"Whatever the direction is, is also the direction of the volatility. If rates go higher, we would expect to see more volatility. If rates go lower, it's hard to make it lower, but the result of lower interest rates has been lower volatility. That term in the risk divided by return equation, you can be sure the vol will increase if rates start to rise."

Lee Robinson, founder, Altana Wealth & Nexus Club

"Negative interest rates lead to all sorts of problems. You are seeing people taking money from the banking system and putting it in their own safes…It's making the whole system more fragile."

Juan Antolin-Diaz, economist, Fulcrum Asset Management

"(Even if) activity continues to recover, inflation goes gradually back, and the Fed probably starts rising interest rates in September, perhaps December - this is the 'everything goes as planned' scenario - even in that scenario, it is possible that the first time that there is an interest rate increase, the uncertainty generated by a transition into a completely different world from the one we've been in for the last seven years could generate substantial turbulence."

Panel: Seeking returns and managing risk in alternative investment portfolios

Carmen Thompson (third from right), investment director, Hedge Funds and Distressed Investments, Rice Management Company, Rice University

"Hedge funds as a stand-alone allocation, the roughly quarter of the endowment, that is the bucket that is currently used, and for the past four or five years has been used, for portfolio ballast..It is playing the role of ballast in an equity downturn but not costing you money over the long term. It is an insurance policy that should not cost you money."

Shawn Goodman (second from right), managing director, Investments, Vanderbilt University

"We tend to focus on emerging managers, especially in the long/short equity bucket. So we're often dealing with managers pre-launch who have no returns history of any kind, which can add a lot of challenges in and of itself, but that's where we've spent the bulk of the past year focused on."

Family Offices - how does risk profile direct investment choices?

Michael Rosenthal, head, Hedge Fund Investments, Signia

"What really worries me is that there are no liquidity providers any more. It was very fashionable to bash proprietary trading and it was very fashionable to bash investment banks...What people forget is that prop provided liquidity to the market. Investment banks provided liquidity to the market. Who provides liquidity to the market when things go south?"

Portfolio manager address: Brooks Ritchey (pictured bottom right), senior managing director, head of Portfolio Construction, K2 Advisors

"It was a fantastic decision five-and-a-half, six years ago to go passive and just buy some cheap ETFs…The VIX was trading at 88, the world was coming to an end, and there was no need to be super-active in hedge funds or fund of funds. Just buy some cheap, risk-on beta. Well I am going to make the case today that that cycle may be shifting…Maybe now is the time on active management, on alpha, in fact, hedge funds, which I call superalpha, or super-active."

Beyond 60:40 thinking: Bob Savage, chief executive, Track Research

"Diversification is not enough. In fact, diversification is a bit of a mug's game because correlations change…When you're running a model portfolio stopping out makes no sense because it's very hard to get back in. But stopping out actually does smooth out performance…Stopping out, or proper risk management, in many ways is a form of trend following."

What is the world coming to? John Hulsman, geopolitical expert and life member at US Council on Foreign Relations

"Here is the plan: Do less in the Middle East, Let the Europeans handle their backyard, or not, do more in Asia, don't do stupid stuff. That is a strategic plan."