The bull market in U.S. equities is now just over eight and one-half years old, but it is probably the most despised rally in history. Wall Street is behaving as a child caught with its hand in the cookie jar.
Even back-to-back hurricanes, one of which engulfed an entire state, did nothing to alter the course of this rally.
Why the Skepticism?
Bull runs are a fact in the history of U.S. equities, yet many in the investment community seem weary of waiting for the wheels to come off this one. A substantial swath of investors do not trust this rally, but they have been unable to ignore it, resulting in many sleepless nights, frayed nerves, and a constant sense of foreboding. In short, this rally defies understanding and this has earned their ire.
Hedge fund managers are no exception. As we know from performance results, many were late to the party and others have no plans to attend. In fact, in a recent Merrill Lynch survey of 214 fund managers, the data points to the largest jump in more than a year in hedging activity geared to mitigate a sharp decline in the equity market.
Blue chip corporations, swollen with cash, have turned to corporate bonds and government paper. Corporate treasurers, who rarely strayed beyond commercial bank deposits and short-term money market funds, found no solace in the meager returns produced by these familiar standbys. Some 30 companies, such as Ford, Boeing, Alphabet and Microsoft, have more than $1.2 trillion in cash and cash equivalents. These same corporations, collectively, hold more than $400 billion in U.S. corporate bonds, garnering around 5 percent of the outstanding market.
As these corporate giants emerge as leading investors in corporate debt, they add to the momentum behind the bond market rally. Many in this market have expressed their concern that this is creating a bond market bubble that inflation and/or accelerated growth could burst.
What Does the Future Hold?
Of course, that’s anyone’s guess. However, two indisputable scenarios are emerging. First, the current bull run is being met with increasing investor skepticism and, second, the bond market is misbehaving due to major investments by corporate giants.
These two scenarios have the potential for creating a self-fulfilling prophecy that does not bode well for the future of the U. S. economy. However, to these concerns we must add the so-called student loan bubble and the auto loan bubble, which combine to the tune of around $2 trillion.
What Does it All Mean for Hedge Funds?
Properly marketed, investor concerns could be met handily by the hedge fund industry. Investors are facing a perfect storm and the hedge fund industry is uniquely qualified to address their needs and their concerns on these fronts.
The problem with the hedge fund industry is that it is incredibly weak on marketing. Few funds seem aware that the decades old shackles, which prevented advertising, have fallen away. In the current climate of investor sentiment, the time to invest in sound marketing strategies has arrived.