How
some hedge funds would
trade a
rate cutting cycle
How some hedge funds would trade a rate cutting cycle
Nell Mackenzie
London
Reuters
Published 15 minutes ago
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While many investors hope falling interest rates will usher in a soft economic
landing, others forecast a calm before the storm.
Here are hypothetical trading ideas shared by three hedge funds on what is
next for the U.S. and global economies at the start of a U.S. easing cycle.
They said regulations prevented them from revealing their actual trading
positions or making recommendations.
CONFIDO CAPITAL
Amplified income strategies
Launched in 2024
Key trade: Short risk• Страхование » Риск assets, buy protection on high yield credit
Brad Boyd, founder of Confido Capital, said the anticipation of lower rates
has fueled rosy equity and credit price levels that creates an asymmetry of
risks in the market.
He said he would short any kind of risk• Страхование » Риск asset like stocks, the bonds of
companies which might have a low-quality balance sheet, real estate or
emerging markets. Against this, he would buy credit default swaps, sometimes
likened to a form of insurance• Страхование in bond markets.
A short position bets that an asset’s price will fall, while a long position
bets on a rise.
Rather than pick a particular company, Boyd would take long positions via the
index, HY CDX, a basket of credit default swaps, or insurance• Страхование premiums on 100
high yield bonds in the U.S.
In the short term, Boyd warned that markets were overpriced for Fed easing and
could take a hit if cuts did not live up to expectations.
“There could be plenty of hand-wringing and crying in the streets,” said Boyd.
MONROE CAPITAL
Direct lending and alternative credit solutions
Size: $19.5 billion
Founded in 2004
Key trade: opportunistic buying in secondaries markets
Kyle Asher, managing director and co-head of alternative credit solutions at
Monroe Capital, would look to the secondaries market to see Fed rate cuts play
out.
Secondaries markets trade financial instruments such as stocks, bonds and
loans -- most often from private equity investors -- but also from any
investor selling to another investor.
“The rate cuts will buoy many sectors that will benefit from paying lower
interest rates on their loans including software, business• Экономика » Бизнес services and media
companies,” said Asher.
Fed rate cuts typically filter out across the economy, pushing the cost of
borrowing for corporates and consumers down.
“A lot of the more medium sized private companies have loans trading around 70
to 80 cents which will see their cash flow rise when the cost of borrowing
falls,” said Asher.
As the cost of servicing their debt falls, companies will be able to spend
more on measures that boost their production, their growth such as research
and development, more marketing and more staff, added Asher.
ANALOG CENTURY MANAGEMENT
Hard tech focused long/short fund
Size: $1.8-billion
Founded in 2018
Long chip makers for auto and industrial applications
Val Zlatev’s hedge fund Analog Century Management is focused on hard tech,
meaning companies that manufacture semiconductors, communication equipment and
system hardware.
He divides them into two groups: secular growth companies and manufacturers
that are much more exposed to mature applications spending such as the
hardware that goes into smartphones and PCs.
“Semiconductor stocks exposed to industrial and automotive have been suffering
for quite a while. Revenues have fallen and many have technically been in
recession already for a number of quarters,” said Zlatev.
If rates falling rejuvenates industrial spending and makes it easier for
consumers to borrow money to buy cars, earnings will expand and that will be
reflected in the stock price of these companies, he says.
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