![\"a_regime_shift_would_have_both_macro_and_micro_implications.jpg\"](\"http:\/\/www.next-finance.net\/http:\/\/beta.next-finance.net\/wp-content\/uploads\/2017\/01\/a_regime_shift_would_have_both_macro_and_micro_implications.jpg\")
<\/a>We expect less monetary accommodation, more fiscal push, and more policy ruptures to
\nsupport an inflection in rates and inflation. Greater dispersion, more typical asset
\nrelationships and rising volatility might be in store, especially in the US where the process
\nis more advanced (see below table). These factors would benefit hedge funds.
\nThis is not to say that the situation is perfect. The regime shift will be gradual.<\/p>\n
If it eventually disappoints, the toll on markets and the economy would be all the more severe.
\nMoreover, a number of factors impairing alpha persist. Yet, the backdrop did improve,
\ncalling for some repositioning in our view.<\/p>\n
We would reweight US L\/S Equity funds, focusing on fundamental styles, as they would be
\nthe prime beneficiaries of improving alpha conditions. Small Cap funds are also worth
\nexploring. We expect sector rather than stock alpha in Japan, which is still under QE
\nconstraints. We favor Variable over Neutral funds. In Europe, the beta is appealing but
\nwould be volatile, leading us to a sO\/W on Variable bias and a sU\/W on Neutral bias.<\/p>\n
We expect US corporate activity to heat up. We are sO\/W on US Merger funds as well as
\non Special Situations which are well positioned on the reflation trade, yet not overly beta
\nexposed.
\nCredit markets might not be the first domino to fall on rates, but they offer mixed beta and
\nalpha which is scarce. We favor multi-credit funds to benefit from dislocations.<\/p>\n
Macro funds would benefit from higher macro differentiation, but would still be constrained
\nby political uncertainty. Expect greater fund return differentiation. CTAs’ fate relies on the
\nregime shift’s pace. We are sO\/W on LT models after their profound portfolio adjustment.
\nFinally, we expect to increase our focus on volatility strategies by the second half of 2017.<\/p>\n