Morgan Stanley IM: How Higher Yields and Growing Alpha Opportunities May Lift Hedge Funds

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KEY TAKEAWAYS

1. The resurgence of fixed-income yields over the past 18 months provides a tailwind for a number of hedge fund strategies that have significant unencumbered cash balances.
2. Long/short equity and credit funds are examples of strategies earning more on their cash collateral posted for short selling. Similarly, futures and other derivatives-based strategies are earning more on cash balances in excess of their margin requirements.
3. Hedge funds are also benefiting from growing alpha opportunities, thanks to a wider dispersion of returns. Following macroeconomic uncertainty that drove asset correlations higher in 2022, the focus is returning to microeconomic, asset class and issuer specifics—a boon for managers seeking to leverage their proprietary research.
4. We believe these trends suggest that investors should review portfolio allocations, in light of the greater potential we currently see in fixed-income and hedge funds, relative to equities.

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