Concerned investors pile into hedge funds – CNN | Jewelry Dukan

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For years, the climate for hedge funds has been harsh. Volatility was low. The price of everything went up. It wasn’t that hard to make money. Why think outside the box in such an environment?

But as central banks continue their aggressive campaign of rate hikes aimed at bringing down inflation and sending markets on a rollercoaster ride, alternative strategies are getting a different look.

“Certain hedge fund strategies can perform well in volatile and sideways markets, an environment that we expect will continue into next year,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told clients on Tuesday .

After a summer rally, the markets have started to fluctuate again. Concerns have been raised ahead of Tuesday and Wednesday’s Federal Reserve meeting, when the only debate will be how much to raise interest rates.

The S&P 500 just posted its worst week since June. Government bonds are also experiencing a sharp sell-off. The yield on the benchmark 10-year US Treasury bond, which is moving in the opposite direction, hit its highest level in more than a decade on Monday.

Regardless of what the Fed announces tomorrow, uncertainty is likely to remain as the central bank stresses that it intends to continue making meeting-to-meeting decisions.

“Volatility will be the dominant theme in the second half of the year, especially as central banks remain data dependent,” Laura Cooper, senior macro investment strategist at BlackRock, told me.

That’s fueling interest in hedge funds, where professional investors try to beat the market with less conventional approaches.

These funds struggled in the wake of the global financial crisis. Low interest rates and a period of relative calm in the markets limited contrarian opportunities. Now they have an opening again – and some are finding success.

Hedge fund performance improved in August, even as the stock market fell, according to the latest HFRI 500 Fund Weighted Composite Index, which tracks the industry’s top funds.

Not all types of funds are the same. Macro funds, which seek to profit from political and economic volatility, excelled. This category is up 14.8% year-to-date, while the S&P 500 is down 17% through August.

According to Robert Sears, chief investment officer at Capital Generation Partners, which invests in hedge funds for wealthy families, investors trying to profit from the turmoil in commodity markets have done particularly well.

There are also stock selection opportunities as some companies are better positioned to weather high inflation and an economic downturn. In recent days, warnings from the likes of Ford (F) and FedEx (FDX) have raised concerns that a wave of earnings downgrades could loom.

“Until we get into a cycle of falling earnings and the Federal Reserve starts easing monetary policy, you’re really set for an environment where hedge funds should do quite well,” Sears told me.

Not everyone wants to take bigger risks. Nuno Matos, CEO of Wealth and Personal Banking at HSBC, has noticed an important shift in his clients.

Global investors are “not as active as they used to be,” and many want to “buy more protection for their portfolios,” Matos said Monday in an interview with my CNN business colleague Michelle Toh.

“We’re seeing clients sit a little on the sidelines,” Matos said, adding that many have turned to bonds in search of “stability.”

Matos shared how Europe’s largest bank advises its clients, which include both wealthy and retail investors.

For starters, diversification is now not just nice, it’s “mandatory,” the executive said.

That’s not all: He also suggested investors review “value” stocks versus “growth” stocks, essentially prioritizing large companies with stable market shares and healthy payouts for shareholders over other fast-growing companies.

Even when a lot of people are selling assets, “you want to stay invested,” Matos said, pointing to the adverse consequences of holding cash during periods of high inflation.

The banker also said his team is optimistic about the US dollar’s strength, partly because they think the American economy “weathered the storm better than, say, the European economy.” The US dollar has surged to its highest level in 20 years while many other currencies have plummeted.

How long it will take? Matos believes the current investor hold-up will extend into the middle of next year as markets better understand how interest rates are stabilizing and get “some breathing room.”

Sweden kicked off a crucial week of central bank decisions with a surprisingly large rate hike and set the tone for forthcoming announcements from the Federal Reserve, Bank of England, Bank of Japan, Swiss National Bank and Norway’s Norges Bank.

This just happened: The Riksbank hiked interest rates by a full percentage point to 1.75% on Tuesday in a bid to slow inflation. Inflation in the country rose to 9% in August.

“Inflation is too high. It erodes households’ purchasing power and makes it harder for both businesses and households to plan their finances,” the central bank said in a statement. “Monetary policy now needs to be tightened further to bring inflation back on target.”

Why It Matters: The European Central Bank, a Riksbank counterpart, hiked interest rates by three-quarters of a percentage point earlier this month. Since then, however, concerns about stubbornly high inflation have spread through the financial markets.

Investors see an 80% chance the Fed will hike rates by three-quarters of a percentage point on Wednesday. But after last week’s data showed inflation rose more-than-expected in August, it leaves some room for a full point move.

US Housing Starts and Building Permits for the August Post at 8:30 am ET. Stitch Fix (SFIX) reports results after US market close.

Coming tomorrow: It’s all about the Federal Reserve’s recent monetary policy decision.

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