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A hedge play on divergent economic recoveries

GSAM's relative value strategy plays on movements between countries rather than typical market dynamics, according to Jonathan Xiong, head of the firm's alternative fixed income strategies.

As a hedge fund manager, Xiong said he looks at things differently than traditional asset managers. Instead of assessing market risks and then trying to pick the best bond or stock, he looks at things on a relative basis.

In the current market environment, Xiong will be taking bets on how each country’s economy responds in an environment where central banks are shifting to monetary tightening from monetary easing.

“When you have a change of sentiment, not every single country comes out of this recovery process at the same time. You are going to have a divergent recovery process,” he explained.

“Maybe US raises rates and then Europe can’t, and the next round is Europe raises rates and US can’t. It’s these relative value dispersion trades.

“Instead of saying ‘I’m just going to buy US bonds’ [like traditional asset managers], how about, `I’m going to bet on how US interest rates are going to move relative to European interest rates?’ So I go long European bonds and I go short US bonds.”

With the relative value strategy, Xiong is not exposed to market dynamics but more of the relative movements between Europe and the US.

“So now I don’t have a duration factor, I don’t really have a curve factor, I am just left with a country factor.”

Hedge fund woes

Hedge funds globally have seen net inflows coming from investors. For the first eight months, investors added around $38.71bn in hedge funds, versus net outflows in 2016 of $111.64bn, according to an Evestment report.

The hedge fund industry is now at an all-time high, holding assets of around $3.209trn.

This year, macro strategies were the most popular in the hedge fund industry, accumulating $17.86bn, followed by directional credit ($10.52bn), market neutral equity ($6.89bn) and long/short equity ($5.55bn).

However, hedge funds continue to underperform the market while on average charging higher fees than traditional mutual funds. The median ongoing charges (OCF) in Singapore’s hedge/structured product fund sector is 2.06%.


Lacklustre hedge fund performance

YTD (August) 2017



Hedge fund aggregate




50% MSCI World / 50% Citi WGBI




S&P 500




Source: Evestment

Xiong blames the muted performance largely on risk controls, although the low volatility environment is a contributing factor. Managers today quickly get out of their bets when they start to see they are losing money, whereas previously people would “double down” or continue holding their positions, he said.

“Nowadays, there’s a much more process-driven framework to risk management in most hedge funds,” he said. “You wouldn’t believe the amount of risk controls that are in the systems today. We have a whole risk infrastructure that was not there prior to 2008.”

Xiong said he manages risk making the up and down side  “symmetrical” − if the upside is 3%, the downside should be more or less the same.

“Traditionally, when you invest in an asset such as bonds, your upside is capped but your downside is not, so it’s very asymmetric.”

Hedge fund warming?

Private banks have been recommending clients invest in alternative asset classes, such as hedge funds, real estate and private equity, for diversification from stock and bond markets that have generally high valuations and worrisome low volatility.

Arnaud Tellier, Singapore-based head of investment services for Asia-Pacific at BNP Paribas Wealth Management, told FSA previously that alternatives serve as a mid-to-long term diversifier with the probability of achieving higher-than-average risk-adjusted returns compared to traditional asset classes.

Tellier recommends allocating 5%-10% to alternatives as part of a client’s long-term strategic asset allocation. Similarly, Bank of Singapore is recommending a 14% allocation from the 10% recommendation last year.

GSAM’s Xiong observed that private banks have fixed allocations for alternative investments and within those allocations they are very accepting of hedge funds.

“It just depends on the individual private banks,” he said, adding that he knows of a private bank that is allocating as high as 20% to alternatives.”


GSAM’s Global Strategic Macro Bond Portfolio, managed by Xiong, versus its benchmark and sector.

Source: FE. Data since the fund’s inception in October 2014. All fund, sector and benchmark NAVs have been converted to US dollars. In Singapore, the fund is available to retail investors. In Hong Kong, only available to professional investors.


Part of the Mark Allen Group.