Risk Rap

Rapping About a World at Risk

Fund Managers Shifting Styles

This little ditty appears in today’s Euromoney Institutional Investor On-line Network website. Merrill Lynch foresees a $175 billion reallocation of institutional investment portfolios in the US and UK. Surprise surprise, the reallocation is a shift away from equities and into more debt type investment vehicles.

The article states “redemption” which suggests that the reallocation will be done with hedge funds. It’s not surprising that the larger institutions are shifting away from equity centric strategies. During a recession it’s not the best time to own a company and a move away from equities is a prudent decision. A point of concern is that that redemption windows and investment lock-up provisions in hedge funds, private equity and other alternative investment vehicles are done on quarterly, semi-annual or annual cycles; and this style shift in institutional investment capital could signal long term softness in equity markets. This could also signal that the prevailing institutional investor sentiment is that the recession could still be in its early stages.

The move into debt type strategies is also a bit curious given all the headwinds in the credit markets. This could be read as an encouraging sign that liquidity may be returning to the credit markets and the return of funding sources could signal that the credit crisis has indeed bottomed. However, macroeconomic factors for total return debt strategies are mixed. As central banks struggle with the specter of inflation, they will be forced to raise interest rates which usually depress the value of fixed income securities. This will push yields on debt securities higher.

The big winner’s will be found in high yield and distressed strategies. As listed companies cut stock dividends on equities due to declining profits institutional fund managers will be looking to invest in high yield and distressed debt vehicles to fulfill yield capture mandates of its investment program.

Recessions produce many opportunities to invest in distressed securities and companies in default. It is one of the unfortunate opportunities trying economic times produce for investors. (See Risk Rap’s post of May 2, Corporate Credit Markets Redux.)

Lets let a young Lionel Richie and The Commodores take us out with Night Shift.

Risk: hedge funds, private equity, style shift, asset allocation, equities, debt, credit, market, recession, interest rates, distressed investing

June 23, 2008 Posted by | credit crisis, hedge funds, institutional, investments, pop, recession | , , , , , , | Leave a comment