Diverging opinions on the fate of the US economy are leading US long/short managers to adopt dispara...
Diverging opinions on the fate of the US economy are leading US long/short managers to adopt disparate views on how best to enhance performance in their portfolios.
While some are banking on economic recovery, of which there have been some positive signs, others believe the market will retrace some of its recent gains.
Robert Lang, chairman and chief executive of Lang AM, is in the pessimistic camp. Lang's US long/short portfolio is positioned 100% short, with the best shorting opportunities among 'grossly-overvalued' technology stocks.
'If you look at price to sales, there is no way these companies are going to justify current prices,' he says of many in the sector. Consumer durables and banks are offering some attractive shorting opportunities due to their unjustified high prices.
'In the next six months the market is vulnerable,' he says. 'I think there is a huge risk in the market, but sentiment from players is bullish, so many managers will be caught out.'
This is due to an attitude change that has occurred within the hedge fund industry, according to Lang.
In the 1980s in uncertain market conditions managers would scale back exposure to protect themselves, but managers are more willing to take risks, he says, as they want to make money from the higher performance fees hedge funds levy.
While this attitude could change if managers see large-scale redemptions due to their poor performance, says Lang, the lure of incentive fees continues to drive the investment decisions of a large chunk of managers.
Lang concedes there is a danger in a full allocation to shorts as, although fundamentally the market should fall in his view, this could still take some time due to irrational behaviour, which could hurt portfolios taking such a markedly bearish view of the market.
'And the market can be irrational longer than you can remain solvent,' he adds.
Recent reports on job growth confidence in the US have shown falls in optimism, says James Hedges of LJH Global Investments.
This decline in confidence is likely to be reflected in the retail sector stocks in the short term, according to Lang, with the corporate sector unlikely to come to the rescue due to pricing pressures. These suggest market falls soon and profit to be made from a short bias.
But not all share Lang's gloomy outlook. Rick Campagna, managing director at Shaker Investments, takes the opposite view, and has a net-long bias of about 30%.
'Between now and the US election, the government and the Fed will do whatever is necessary to get an economic recovery going,' he says.
'I think we are safe for the next 12 to 18 months, although there may be problems in 2005.'
For long positions he looks for growth potential. Technology has seen the fastest growth and because there is still a need for productivity gains in many companies, Campagna says there is significant potential for an increased expenditure on technology.
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