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Hedge Fund Managers See Migration of Assets Into Equities

Date: Wednesday, September 26, 2012
Author: Forbes

As part of a fundraising event by hedge funds known as Trading Day for Kids, three of the industry’s titans convened to share their feelings on the likely direction of the markets over the next few weeks and during 2013.  Their thoughts offer insights for traders and investors and may inform some of the strategies they have in place.

Before sharing these, it’s worth giving the concept known as Trading Day for Kids some coverage because the only beneficiaries are under-privileged youths in New York City.  Specifically, on Trading Day for Kids, participating hedge funds run all of their trades through one brokerage firm on a given day, which this year is October 25.  The brokerage firm then donates the commissions from the day’s trading to Youth, I.N.C. who in turn distributes funds to a variety of non profits who empower young people in the New York City metropolitan region.

The panelists consisted of Steve Einhorn, vice chairman and portfolio manager for Omega Advisors, Harvey Eisen, chairman of Oak Advisors and Michael Novogratz, a principal with Fortress Investment Group.

Einhorn was bullish on equities at the beginning of 2012, predicting a 15% rise in the S&P 500 this year, “But now that we’ve reached this plateau, I find myself far less excited and see the markets not moving up or down principally because the assets and liabilities of the market remain in balance.”

On the plus, or asset side, trends which auger against significant downside in the market include a self sustaining, albeit weak, economic recovery, which based on post war trends has perhaps two more years, monetary easing on a global basis, and a corporate sector returning what Einhorn called “buckets of cash to investors.”

On the negative or liability side, Einhorn noted the emergence, for the first time since 2008, of difficult year over year earnings comparables, an economy, that while growing is still close to stall mode, and finally, dysfunction in Washington that seems incapable of dealing with pressing problems.

“It’s going to be a push me, pull you market for some time,” Einhorn said.  “There’s upside with accelerated economic growth and or a Romney victory, and downside with a shock from the Mideast or Europe.”

Fortress’s Novogratz was more bullish than Einhorn, principally on the belief that fear of an implosion in Europe has, through the deft political machinations of German Chancellor Angela Merkel, been avoided with the European Central Bank’s aggressive bond buying plan.  “A huge overhand has left the market with the perception that Europe will not implode.”

Novogratz also cited the fed’s plans for QE III, which is, he says, is tantamount to doubling down by Bernanke on his strategy to date.  “Basically Bernanke is saying to you, ‘I am going to drive down rates on fixed income instruments to levels so low that it’s going to force you to invest in riskier assets.‘“

While Eisen agreed that assets in fix income will migrate toward equities, it takes a long time to change investor’s minds, especially pension fund managers.  “Most pension funds would rather lose 5% in fixed income investments [by earning 2% and paying out 7%] than take on a risk trade with a possible loss of 15%.”  Accordingly, he said, with the concurrence of other panelists, “Assets will migrate slowly.”

Still the impact could be meaningful.  With approximately $10 trillion in assets under management in defined benefit pensions, unsustainable losses because of ultra low yields is unsustainable.  Their allocation toward equities could provide a sustained tailwind to equities, the panelists said.

Investor Einhorn conducted a brief and informal poll of the audience – consisting of hedge and institutional fund managers – the majority felt that European equities would perform best in 2013, followed by U.S. equities and gold.  The audience also believed, almost unanimously that Obama would win the election.

The investors noted that as far as Trading Day is concerned, their outlook matters little.  According to Eisen, “You only need lots of opinions to generate trading volume, and the hedge fund community has no shortage of these.”    Novogratz did say however, that long term bullish trends are important for young adults.  “The shrinking of the financial services industry has been painful.  Expansion will provide more opportunities for young people who want a better life.”