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Hedge fund adviser Patrick Ghali on crypto, ESG and why clients are dumping ‘any exposure to China’

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Patrick Ghali, co-founder of hedge fund advisory Sussex Partners, talks with Financial News about how his clients are adapting to this year’s sharp downturn in markets and how they’re positioning for a recession, a crypto winter and sustainable investing.

His comments have been edited for clarity.

In between the war and where energy prices go, and inflation, it’s not looking good. And then, the differences in yields between core Europe and the periphery. It’s not looking great. It really isn’t looking great.

There’s also not that much appetite, at least from our clients right now, to any sort of directionality. I think what you’re looking for is just diversifying exposures, a lot of cash. I don’t see anyone who’s sort of putting on a big trade.

One thing that people are starting to talk about, again, is Japan. Could the yen be due for a huge rally? Could it be massively undervalued? Could the Bank of Japan eventually have to give up their strategy and raise rates? That’s something people have started to look at. I think you’re going to see more positions there.

How are they looking at crypto?

The crypto guys actually [have] not done well this year. You have a few that have a differentiated approach where they made a lot of money last year and managed to hang on to it this year.

It’s less of a question to me of where the price level is. As long as the market continues to be inefficient, and volatile, and you can trade it, there will be opportunities for people to make money.

And the important thing is, can they do it in a safe way? Can they get their money out, or are they going to end up in a situation where they’re invested too heavily in a certain currency which goes bust? Or exposed to some exchange which suspends redemptions?

If you are highly diversified, and you can figure out a way to trade in such a way as to get your money out… It doesn’t matter what the price level is so much because…you’re not trading on fundamentals. Fundamentals [in crypto] don’t really matter.

It’s also very divisive. So you have some investors who like the idea and see it as an inefficient market, and therefore they want to be exposed to it. Because inefficient markets equal alpha, typically.

But then you also have a lot of investors who just don’t want any exposure whatsoever. And we’ve certainly seen some cases where some funds have suddenly decided to take very large positions in crypto where it almost seemed like style drift — if you were trading equities and fixed income in the past and now you’re 30% in crypto, that’s maybe not what you signed up for as an investor.

And so we’ve seen some funds that have gotten heavily invested in crypto, almost overnight, which then has been met with big redemptions from investors, because that’s just not the exposure they wanted.

And then you also…have CTAs [commodity trading advisers] and quant firms which are going into the crypto space, and adding that to their investable universe.

There’s been a big backlash this year against ESG investing. How are fund managers approaching this issue?

ESG is one of the biggest investment opportunities of our lifetimes. The government has allocated a staggering amount. Becoming energy independent is becoming more important. So I think the opportunity has changed. But people are also starting to realise more and more what’s being sold isn’t necessarily what’s in the box.

[Take ESG ratings], the amount of ratings that are out there, and how different they are. It’s incredibly confusing for investors. Everybody has their own methodology in some cases.

It’s very difficult to do the right thing and try to stick to the right methodology when no one can agree on what that should be. And then add the additional risk that you are liable to face prosecution. So I think that’s going to give people some pause. But that doesn’t mean ESG is going away. It’s going to get more refined and people are going to realise that integration, for example, doesn’t necessarily work. And they’re realising that there are some strategies that are going to make more sense.

It’s also about risk management, because you might end up in a situation where, first of all, government policy can change and you might end up in assets…  You might end up with proven reserves, because you’ve invested in oil companies that can never be never be used, because governments decide that you can no longer burn fossil fuels. And therefore your proven reserves are going to stay in the ground forever, right? So you’ve got an orphan asset, that’s not going to help you. And it’s also not going to help you if the industries you invest in contribute to the destruction of the environment you live in, and then you also have nothing.

What else are clients talking about? 

The other conversation you have with people is China. Is China investable? Is China not investable? Is it the bargain of a lifetime? Is it the next Russia? I don’t think it’s the next Russia. China is going to continue to be important – their market continues to be an inefficient market. It’s a major economy. That’s not going to change anytime soon. But we’ve seen clients who’ve said to us, ‘You know, remove anything with a China exposure, any exposure to China whatsoever.’”

And then we’ve got other clients who think this is a terrific opportunity to get involved. It’s just some real divergence of opinions going on.

Bears are worried that China could position itself in such a way that it becomes a pariah state. You could see sanctions on China, you could potentially see even asset freezes like we’ve had with Russia, in which case you wouldn’t be able to get your money out. It’ll be a repeat of what happened. That’s sort of the most extreme scenario.

The bull case is that things are going to start normalising. China’s going to start opening up like the rest of the world. It might drop this Covid policy at some point. The economy’s going to bounce back. Allocations are very, very low. The markets are very depressed, and so you might have a big bounce in equity markets, and opportunity for outsized returns.

To contact the author of this story with feedback or news, email Trista Kelley

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