How hedge funds are positioning themselves for a soft landing

By Nell Mackenzie, Carolina Mandl and Summer Zhen

LONDON (Reuters) – Bond, stock and currency market bears with portfolios designed to gain from a recession have been fleeing losing trades as big economies such as the United States prove more resilient than expected.

A so-called soft landing, where central banks manage to curb inflation without triggering a recession, has gained traction, prompting some investors to take on more risk.

Five hedge funds shared trading ideas for soft-landing scenarios. They cannot reveal trading positions or make recommendations for regulatory reasons.

1/ NEW HOLLAND CAPITAL

* Multi-strategy hedge fund

* Size: $6 billion

* Founded in 2006

* Key trade: Primary stock markets

Market narratives have shifted towards a soft landing and a decline in volatility, said New Holland Capital co-chief investment officer Bill Young.

He reckons a soft landing might boost volumes in primary stock markets where companies first raise money in initial public offerings (IPO). The year so far has seen the lowest number of company IPOs since 2020, the height of COVID-19, according to Refinitiv data.

“You can only shut off that spigot for so long,” Young said. “Eventually, companies will need to access the capital markets.”

Hedge funds often trade in capital-raising events, IPOs, follow-on secondary offerings and by purchasing cheaply priced warrants, he said. His multi-strategy hedge fund employs a mix of portfolio managers suited to both recession and soft-landing scenarios.

2/ WEISS MULTI-STRATEGY ADVISERS LLC

* New-York based multi-strategy fund

* Size: $3.1 billion * Founded in 1978 * Key trade: Betting on companies/indices left out of this year’s rally; shorting expensive stocks/indices that have rallied Weiss is betting on a U.S. soft landing, says deputy chief investment officer Michael Edwards.

He expects to see more companies benefiting from growth, including in the manufacturing sector, with a U.S. interest rate tightening cycle close to an end and inflation “relatively benign.”

Stock gains this year have been concentrated in the technology sector, fueled by optimism about AI. The tech heavy Nasdaq has risen 27% so far in 2023.

From now, Edwards expects this to reverse and companies that have lagged to recover. He suggests, for instance, taking a long position in the small-cap index, up just 5% so far this year, while shorting the Nasdaq.

3/ MAERLI CAPITAL

* Multi-strategy hedge fund

* Size: 300 million euros ($328 million)

* Founded in 2022

* Key trade: Short Russian rouble and Moscow Exchange futures, long Gazprom (MCX:), Lukoil and Russia’s gold mining sector

Maerli Capital founder Anastasia Tarasova does not believe Russia’s economy, hurt by war in Ukraine and Western sanctions, is in for a soft landing.

She would short Moscow Exchange stock futures and the rouble against the dollar but invest in undervalued stocks such as Gazprom, Lukoil and gold miners.

Tarasova notes Russia’s central bank has two levers to support its economy, interest rates and currency regulation.

The central bank last week hiked interest rates by 350 basis points to 12% to help support a battered rouble, while talk of currency controls has grown. Gazprom and Lukoil did not respond to requests for comment.

4/ UNION BANCAIRE PRIVEE (UBP)

* Japan equity long/short hedge fund strategy, market-neutral, governance focused

* Size: Roughly $100 million, part of $160 billion UBP

* Founded in 2020

* Key trade: Long Japanese exporters, short indebted Japanese companies

Zuhair Khan, senior portfolio manager at UBP Investments, believes the yen will continue to be held down near-term by high U.S. rates and a cautious Bank of Japan.

Khan would buy the stock of Japanese companies that export goods to the United States given robust U.S. demand. Exports to China, Japan’s largest trading partner, fell 13.4% year-on-year in July whereas U.S.-bound shipments rose to a record high.

Khan believes the yen will strengthen slowly but not enough to derail exporter earnings.

“These include electronics, speciality chemicals and certain automotive and machinery names,” he said.

He would be short highly indebted Japanese companies sensitive to high interest rates, including certain materials, transport, restaurant and utility stocks.

5/ BLACKBIRD CAPITAL

* Diversified quant strategies

* Founded in 2019

* Trade idea: Buy high-dividend commodities stocks, adding calls and puts

Blackbird owner and founder Dan Izzo says he would invest in energy companies with high dividends, while selling call and put derivative options that at certain price levels automatically initiate buy (calls) or sell options positions (puts).

Blackbird “supports a few soft-landing ideas which are that the market won’t crater because it’s mostly going sideways, interest rates and inflation will continue to rise over time and commodities rally with inflation,” Izzo said.

Izzo said one way to play the outlook would be to take a long position in U.S.-listed Devon Energy (NYSE:), which pays a 10% dividend yield, and sell call and put options on either side of the stock investment to increase the possibility of profit and protect against prices rising or falling. Devon did not respond for a request for comment.