Difficult market conditions are precisely when hedge funds are supposed to earn their substantial fees
Investors are turning to more exotic strategies as they seek to profit from the coming collapse of the current bull market. Stocks have had a good run since the 2008 financial crisis, which has made life simple for investors: buy the index and watch your investments rise in value. Conversely, the more complex strategies of hedge funds have not performed so well during the same period, as demonstrated by Berkshire Hathaway chairman Warren Buffett’s audacious bet.
For Buffett, this is proof that investors don’t need complex strategies. Simplicity is key. But while you probably shouldn’t argue with one of the world’s most consistently successful investors, many market watchers are forecasting an end to the current cycle and the beginning of a period that is more suited to hedging strategies.
“The investment environment is becoming more testing,” says Kevin Gardiner, global investment strategist at Rothschild & Co Wealth Management. “We are facing a mix of geopolitical tensions—some of which are novel—and a big slowdown in corporate profits. We think a constructive outcome is still plausible, but 10 years into a market upturn, conviction is in lower supply.”
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Market analysts say a recession is unlikely despite slowing growth, and that it has typically paid off to stay invested even during the latter stages of a bull market. But that means being prepared for potentially big short-term falls as volatility rises. Indeed, December saw a big spike in stock market volatility as measured by the Chicago Board of Exchange’s volatility index, while 30-day volatility reached its highest point since 2011 in January.