A Macro-Investing Framework
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Welcome to Loot. Checkout Your Cart Price. They thus have inbuilt hedges if there is a credit correction and will be poised to ratchet up exposure as opportunities present. It is far easier for the underlying manager to do this than it is for the fund of funds manager to move capital around once the writing is on the wall for a strategy. Funds of hedge funds with top-down dominant processes will tend to have a higher turnover as redemptions and subscriptions into funds will be driven not only by the bottom-up due diligence but also by tactical changes from a top-down perspective.
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Europe is the region most challenged by this, so the risk would likely emanate from there. Crescenzi: We worry about tail risk in the developed space, so we track credit default swaps CDS [on the sovereign debt of developed countries], which is investors' assignment of the risk of default on these countries. In Europe, one would want to look beyond the periphery into the CDS of Spain and Italy, to see if investors are worried that the problems will contaminate core Europe, [possibly countries like] France.
You [also want to look at] the credit spreads of Spain and Italy relative to core Europe.
Again, if there is a problem, yields on Spanish and Italian debt would likely rise sharply relative to German and French yields. I'd also add in the money market. Money market rates would rise sharply in the case that sovereign debt issues are becoming a greater concern to market participants. It happened in May ; it happened recently a little bit.
Hedge fund strategy: Top-down or bottom-up? What should FOHFs be doing? | Euromoney
In May, there was a lot of focus on Europe. The money market, one could argue, is 'ground zero' for concerns in the banking system. The international banking system would be put under stress in a case where sovereign debt problems were perceived to be growing.
LIBOR is the easiest to track for [monitoring] money market rates. Crescenzi: The ultimate barometer is the labor market. What would drive improvement in the labor market is final demand. So we want to track consumer spending and business spending to see if 'escape velocity' is being achieved. Escape velocity means if the U. When consumer demand picks up, that ignites a virtuous cycle of self-reinforcing increases in production, income, and spending. New data on retail sales seem to support [the case] that the U.
Perhaps that will lead to gains in employment that will keep the self-reinforcing cycle in place. That's one of the biggest gauges. The financial market itself will be a good gauge.