Why some hedge funds will play the markets this summer

26.04.2016 12:51

Why some hedge funds will play the markets this summer

Karen Tso

Some investors swear by that well-known trading adage “sell in May and go away”. This would mean that next month would bring low trading volumes, thin liquidity and even worse for some – a stock market selloff that permeates over the summer months.

Will this year be any different? And is it worth either staying on the side lines or going on vacation until St Leger day, the U.K. horse race in September that signals the unofficial end of the summer? Some of the best performing hedge funds last week gathered at the Investors Choice Awards and signaled that the next couple of months could be lucrative.

“I believe the famous (theme) sell in May and go away, statistically, has proven to be right historically,” said Stefano Prosperi, chief executive ofKairos Investment Management Limited.

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“This year we started on the wrong foot, the markets surprised a lot of us with the correction we’ve seen in the first quarter, especially in the first month and a half. Maybe this year will be a little bit different in the summer.”

One hedge fund is particularly bullish on European stocks, warning those who opt to soak up the sun could sacrifice portfolio gains.

“Unfortunately, we’ll have to work through summer!” said Rudolf Bohli in jest, chief executive of RBR Capital. He also points to the front-loaded sell-off on stock markets this year as the reason why summer will be strong. Throw into the mix the widely watched “Brexit” referendum on June 23, which global managers cite as a major portfolio risk, and the latest endeavors to fix Greece.

“If there is a solution in Greece and Brexit is behind us, European markets could rally 20 per cent from here.”

Bohli recommended buying European stocks and Greek banks, and added that activist ideas will do well in this market.

“Switzerland is too defensive, Germany is going to do well the DAX, Greece, that’s a little bit smaller in terms of market cap, but that is definitely going to go through the roof,” said Bohli

Credit and volatility may also provide rich hunting ground over summer. Martin Hornbuckle Managing Director of Napier Park said “sell in May and go away” has not been a particularly good strategy on credit markets.

“The summer markets have seen some interesting times in recent years. We often see a lot of supply in June and July and if the market is weak then we prefer to be a buyer.

“This year we’re still at a point in structured credit markets where we are recovering from a weak first quarter, so there is still plenty to go for and the new issue market in leveraged finance is picking up,” said Hornbuckle.

Jonas Stark, CEO of Blue Diamond who trades volatility said summer contains some of the better trading months and it’s actually year end that performs badly.

“December was terrible for liquidity, summer is usually not so bad. It’s depressed volatility but liquidity for what we do is good,” said Stark.

But others dismiss playing the seasonals. Harald James Otterhaug of Oslo Asset Management – the winner of the Investors Choice Awards 2016 – places short and long positions on energy equities regardless of the time of year.

“We don’t believe in those type of seasonalities, we try and buy cheap stocks and sell expensive stocks,” he said.

Many other investors are on his page and deride the May/Go Away theme as a catchy saying with little merit.

Long-term investors hate the idea of timing the market and some hedge funds agree that individual strategies work better for their portfolios.

“We focus on the names we like, we see valuation in a number of sectors and names throughout Europe and Emerging Markets. I don’t particularly time these things,” said Joseph Oughourlian, Co-Founder and Managing Partner of Amber Capital an event-driven hedge fund.

Given the choppiness on stock markets with wide ranges but slim overall returns, combined with a low yield environment globally – staying around for summer to fatten up portfolio gains seems like an appealing prospect.

Karen Tso is an anchor on Squawk Box Europe, CNBC and you can follow her on Twitter @cnbckaren.

Clarification: This article has been updated to clarify that Stefano Prosperi is the chief executive of Kairos Investment Management Limited.

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