The Hedge Fund Sweet Spots

Volatility has dropped to optimal levels for hedge funds to produce alpha, according to JPMorgan.

Andrey Rudakov/Bloomberg

Andrey Rudakov/Bloomberg

Macro and relative value strategies offer the best opportunities in hedge funds as the economy remains shaken by the pandemic, in the view of JPMorgan Chase & Co.’s alternatives investment group.

Funds in these categories could produce gains of at least 10 percent, according to Jamie Kramer, the head of the alternative solutions group at J.P. Morgan Asset Management. They are now offering the best mix of risk and reward as they tend to protect portfolios when markets head south, and do well in rebounds, Kramer explained during a July 30 media briefing.

“All they need is this sweet spot of volatility of between 20 and 25,” as measured by the VIX index, she said. The VIX, which closed at 24.76 on July 30, had spiked above 80 in mid-March as stock markets crashed amid intensified fears tied to the Covid-19 pandemic.

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Hedge funds lost 3.4 percent during the first half of this year, with the macro index losing less than one percent and relative value tumbling about 4 percent, according to Hedge Fund Research. Although stocks experienced a big rebound, the Standard & Poor’s 500 index remained down 4 percent at the end of June.


“We know vol is going to continue to stay fairly high,” Anton Pil, the head of global alternatives at J.P. Morgan Asset Management, said during the briefing.

Kramer agreed, saying “Covid uncertainties persist.” She also pointed to the looming U.S. presidential election, rising risks of inflation, and expectations for the yield curve to steepen as reasons to believe that volatility will remain elevated.

Prior to Covid-19 crisis, volatility was low, with the VIX trading around 12 in early January. But current levels are optimal for hedge fund managers, Kramer said, as they have the best opportunity to produce alpha when the index is between 20 and 25.

“The outlook for hedge funds looks very bright to us,” she said, particularly for relative value and macro managers.