(Bloomberg) -- Anastasia Amoroso, chief investment strategist at iCapital, joined the latest episode of the “What Goes Up” podcast to discuss the market volatility that followed the Federal Reserve’s rate hike and how hedge funds are attracting client interest again after years of languishing in a raging bull market.
She joined this week’s “What Goes Up” podcast to talk about that as well as the biggest Fed hike in almost three decades. Below are lightly edited and condensed highlights of the conversation. Click here to listen to the whole podcast, and subscribe on Apple Podcasts or wherever you listen.
Q: Hedge funds, we see a lot of headlines about some that are struggling, but in aggregate, they’re outperforming. Has the decline revived the demand for hedge funds?
A: It absolutely has and this was part of our outlook -- we anticipated this being a much, much better environment for hedge funds that we get clients interested. And the reason for that is for the last 10 years, really all you had to be is risk-on, for the most part, with a few exceptions. And you buy the dip along the way, but mostly, if you were invested in stocks and high-yield bonds, you probably did just fine. So you didn’t actually need hedged equity in your portfolio. You didn’t really need relative-value trades and so forth. But that changed dramatically this year. And we anticipated this year to be a year of higher velocity and higher volatility, and boy, did we get it?
And so that’s what I think has been so narrative-changing for hedge funds, is all of a sudden there’s equity volatility to trade, there is fixed-income volatility to trade, there’s a lot of macro factors in the driver’s seat. So if you look at the hedge-fund performance, overall hedge fund, HFRI industries, for example, they’re outperforming the market nicely. But even if you further dissect within that, the global macro funds are doing really well. And within that, you have some really top-quartile winners that are really attracting client interest. If you look at relative-value hedge funds, arbitrage strategies, all of those are delivering above-market returns. And also quant -- quant is actually working this year as well. So I do think in this environment, where nothing seems to be working, investors are looking for something that is, and right now that is in the hedge-fund space.
Q: What were your takeaways from the Fed meeting?
A: Even what happened earlier in the week is we got a massive pivot from the Fed during the time when this was supposed to be a no-communication time frame, and we got a pretty strong hint that they’re going to go for 75 basis points. And in retrospect, it makes a lot of sense because the problem with inflation for the Fed right now is they can’t just focus on the core because the headline inflation, the higher gasoline prices, the higher food prices, that’s what’s driving consumer sentiment and that’s what’s driving consumers’ expectations of future inflation. So as those expectations surged, the Fed had to react to it. What do we think now that they have hiked 75 basis points? First of all, we did anticipate this meeting to be a hawkish one. And it definitely was, but I don’t think we can say that it was a hawkish surprise to the markets. And you saw how the markets initially reacted to the path of increases.
The reason I say that is a lot of the market pricing was already in place before that meeting. And if you think about what the markets have been pricing in through February of 2023, it’s close to 4% in the fed funds rate. A lot of those rate increases were already baked in, and that’s perhaps why the Fed was emboldened to do this. But my other takeaway, not a hawkish surprise, but I think a pretty significant move toward restoring the Fed’s credibility. When you look at 8.6% inflation or 6% core inflation, and if you look at the fed funds rate, we were far, far, far too low and the Fed needed to catch up very badly. The fact they’re acknowledging it, they’re doing it, they’re moving is actually a positive for markets because we feel like the Fed is maybe regaining some control.
And then the last thing I’ll say about this, the reason why the equity markets have been so tough this year is because it was really hard to gauge the Fed reaction function. They say they’re trying to be balanced one week. And then they say, ‘Oh, we’re going for 50 basis points. Now we’re going for 75 basis points.’ So you got whipsawed by this Fed communication. But it seems like they’re giving us a more explicit reaction function. The focus now is on headline inflation. If it surprises to the upside, we should expect a more aggressive path of rate hikes. And if it doesn’t, perhaps they can pause. So at least we know that now, and perhaps it’s little consolation to the markets, but at least it does restore credibility in fighting inflation.
Q: You must get peppered with questions about crypto. How are you thinking about crypto these days?
For a while, I will give Bitcoin a little bit of merit for being an inflation hedge. I say that because when inflation was rising and the Fed was doing nothing about it, of course Bitcoin was the place that people wanted to go. But now that the Fed is doing something, doing quite a lot about inflation, you can’t make that argument about that being an inflation hedge anymore. So then you refer to the other side of the coin, which is that it is technology. It is innovative technology and it is unprofitable. So this is why you look at how all the crypto ecosystem has been trading. It’s been trading in lockstep with the Nasdaq and, specifically, with the unprofitable tech. And so that’s why you’re seeing this breakdown of momentum to the downside and until the Fed pauses, until we have a cap to the move higher in rates, you will continue to see pressure in crypto.
But here’s what I also say. And I was at the Consensus conference in Austin last week. And one of the quotes from one of the panels was, make sure that you are in crypto for the mission and not the money. And that really struck me because there is so much speculative froth that has been accumulated in crypto. And I am so, so glad that that is being flushed out as we speak -- that needed to break, that needed to be out of the system. But what’s left is there is a significant utility function to blockchain technology -- can you build better decentralized application for lending, for market making, for transaction settlement, for digital privacy?
The answer is you probably can, and many innovative technologies are working on this. So there is a big mission-driven cohort within the crypto ecosystem. And that’s, what’s exciting and that’s what’s here to stick. But I’m glad that we’re seeing algorithmic alt-coins breaking down. I’m glad that we’re seeing unsustainable lending schemes breaking down. And I’m hopeful that what this ultimately leads to is regulation.
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