Hedge Funds Are the Rage as ‘Nothing Seems to Be Working’: Q&A

The chief investment strategist at iCapital joined the latest episode of the "What Goes Up" show to discuss the market volatility that followed the Federal Reserve's rate hike and how hedge funds are attracting client interest again.

She talked about that and the Fed hike on this week's What Goes Up. The highlights of the conversation are below. You can subscribe on Apple Podcasts or wherever you like.

We see a lot of headlines about hedge funds that are struggling, but they are performing better than the rest. Is the demand for hedge funds back to normal?

We expected this to be a better environment for hedge funds that we get clients interested in. All you had to do was be risk-on for the last 10 years. Most of the time, if you were invested in stocks and high-yield bonds, you did well. You didn't need hedged equity in your portfolio You don't really need relative- value trades. This year, that changed a lot. We expected this year to be a year of higher velocity and higher volatility.

There is a lot of macro factors in the driver's seat and that is what I think has changed the narrative for hedge funds. If you look at the performance of the overall hedge fund industry, they are performing well. The global macro funds are doing great. There are some really top-quartile winners that are drawing interest from clients. All of the hedge funds that deliver above-market returns are relative value funds. The quant is working this year. 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

What were you able to learn from the meeting?

During the time when this was supposed to be a no- communication time frame, we got a huge pivot from the Fed, and we got a strong hint that they were going to go for 75 basis points. The problem with inflation for the Fed right now is they can't just focus on the core because headline inflation, the higher gasoline prices, the higher food prices, that's what's driving consumer sentiment The Fed had to respond to the increased expectations. We don't know what to think about the 75 basis points hike. We were expecting the meeting to be a little bit hardcore. I don't believe we can say that it was a surprise to the markets. You could see how the markets reacted to the increases.

A lot of the market pricing was in place before the meeting. It is close to 4% in the fed funds rate if you take into account what the markets have been pricing in. The Fed was able to do this because a lot of the rate increases were baked in. The move toward restoring the Fed's credibility is a pretty significant one. We were far too low when it came to inflation and the Fed needed to catch up very quickly. The fact that they acknowledge it, they are doing it, and they are moving is positive for markets because we think the Fed is regaining control.

The reason why the equity markets have been so weak this year is because it was difficult to gauge the Fed reaction function. They said they were trying to be balanced. They said that they would be going for 50 basis points. We have decided to go for 75 basis points. You were shocked by the Fed communication. They seem to be giving us a more explicit function. Headline inflation is the focus at the moment. We should expect a path of rate hikes if it surprises us. Perhaps they can take a break if it doesn't work out. It does restore credibility in fighting inflation because we know that now.

You need to get a lot of questions about it. What are you thinking about this week?

I will give it a try for a while. When inflation was rising and the Fed didn't do anything about it, people wanted to go to Bitcoins. Now that the Fed is doing a lot about inflation, you can no longer argue that being an inflation hedge is still relevant. Technology is the other side of the coin. It's innovative and unprofitable. This is the reason why you are looking at the trading of all thecryptocurrencies. The unprofitable tech has been trading in lockstep with theNasdaq. Until we have a cap on the move higher in rates, you will continue to see pressure in the market.

Here is what I say as well. The Consensus conference was held in Austin. One of the panels had a quote that said, "Make sure that you are in the crypt for the mission and not the money." There is a lot of speculative froth that has been accumulated. I am so happy that that needs to be out of the system and that it is being flushed out. Can you build a better application for lending, for market making, for transaction settlement, for digital privacy?

A lot of innovative technologies are working on this. There is a group of people who are focused on a particular mission. That is what is exciting and that is what is here to stay. I am happy that we are seeing the breakdown of alt- coins. We are seeing unsustainable lending schemes break down. I hope that this eventually leads to regulation.

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