A Playbook for Fed Tightening
Hedged equity has outperformed following periods of substantial monetary tightening, which suggests that the asset class may be appealing now that the Fed has raised rates considerably and is expected to continue doing so. Higher interest rates can also hurt the performance of bonds, so investors should consider shifting assets from fixed income securities while embracing hedged equity.
  • The Federal Reserve has increased the Fed Funds target rate a total of 100 basis points (bps) since December of 2015 and is expected to continue raising rates in the foreseeable future. During two-year periods following Fed Funds rate increases of at least 100 bps, hedged equity outperformed the broad market with less volatility (see chart).

  • Rising interest rates typically create higher dispersion in stock returns. The divergence provides attractive opportunities for portfolio managers who use long and short positions, thereby supporting the performance of hedged equity. At the same time, rising interest rates are generally a headwind for fixed income securities.

  • We believe investors should consider moving assets from fixed income to hedged equity to pursue opportunities being created by rising rates.

The views expressed are the views of Fred Alger Management, Inc. as of July 2017. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

S&P 500 Index is an unmanaged index generally representative of the U.S. stock market without regard to company size. HFRI Equity Hedge Index is an equal-weight-ed, net of all fees, index calculated three times per month of equity hedge strategies contained in the HFR Database. Equity hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. Investors cannot invest directly in any index. Index performance does not reflect deduction for fees, expenses, or taxes. Standard deviation measures how much a portfolio’s return has deviated from its average historical return. 

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