Crypto, taxes & volatility: What hedge funds are eyeing in 2018

(Economic Times India) -- Even a new US president and rising geopolitical tensions couldn't stop stock markets from marching higher. But that's about to change, money managers say. They see a market correction, a "reckoning" with North Korea and a bitcoin ETF in 2018. Here are some of the top themes hedge fund firms - and those who invest in them - are looking for in the year ahead:

More Volatility

A pullback in quantitative easing by central banks globally could trigger a downward spiral in asset prices and spell a "significant change" for the macro trading environment, Paul Tudor Jones wrote November 30. He compared the current bull market to the bubble of 1999. Low volatility is becoming "dangerous" and has lulled investors into a false sense of complacency, he wrote. His firm's main fund lost 2.1% this year through December 8.

Assets most at risk are those reliant on low interest rates, such as highlyleveraged credit, illiquid securities and those that benefit from momentum trading, including FANG stocks — Facebook Inc., Amazon.com Inc., Netflix Inc. and Google, London hedge fund manager George Papamarkakis said. These companies are "definitely prime for a substantial correction" next year given current valuations, he said.

Volatility spells good news for macro hedge funds and the outlook has renewed interest in the struggling strategy. Investors have moved nearly $15 billion dollars into macro funds this year through September, more than any other strategy, according to data provider eVestment.

Crypto Craze

Cryptocurrencies are hot. Mike Novogratz started a $500 million hedge fund to invest in the assets and bitcoin futures contracts began trading at Cboe Global Markets Inc. and CME Group Inc. this month. What's next? Some hedge fund startups plan to offer loans that use the cryptocurrency as collateral, but given the high volatility, expect steep terms.

 "I think we will see a bitcoin ETF in 2018," said Jose Suarez, co-founder of $300 million hedge fund Silver 8 Capital, which invests in cryptocurrencies and blockchain startups, and is up more than 800% this year through December 19.

 "Futures are already giving more legitimacy to the asset class and ETFs will give even more legitimacy, so more institutional investors will make it part of their portfolios. Still, the custodianship issue needs to be solved," he said, referring to security concerns involved with holding the currency.

 Tax Policy

Yesterday, Congress passed the first major overhaul of the US tax code in decades. Kevin Russell, who runs UBS's $5.4 billion hedge fund unit, said the legislation bodes well for stock pickers because the changes will impact companies differently depending on their geographic location, net earnings, effective tax rates and the amount of debt they have. That will create greater price anomalies for traders to exploit.

For $103 million hedge fund Roubaix Capital, the tax bill will be "the most significant fiscal event" for small-cap stocks for the foreseeable future. A corporate tax cut will create fresh opportunities on both the long and short side. For companies getting a tax break, "less than a third of this benefit is currently priced in," the Denver, Colorado-based manager wrote in an email this week. For those firms that already pay little or no taxes, the new rules will have little effect on their earnings, “driving incremental short opportunities.” 

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