Inflation will remain high in volatile markets, warns hedge fund chief
Inflation will remain high because of strong wage growth in much more volatile markets, the head of one of the world’s biggest hedge funds predicted on Tuesday.
Man Group chief executive Luke Ellis told the Financial Times investors needed to get used to volatility with significant moves up and down.
“It will take a lot of years before inflation is put to bed again. We’re in a different paradigm,” said Ellis.
“The base effects are running out and we still have very significant wage inflation. It’s not squeezing services [sector] wage inflation, and services is such a big part of the economy. You can’t get consistently to [a] 2 per cent [inflation target] when you have 6 to 7 per cent wage inflation,” he added.
Ellis said he did not believe stocks, which hit a two-year low in October, had yet bottomed out. He drew a parallel with periods in the 1970s when the real return from equities after inflation was about zero.
“You’re going to get big moves in different directions,” he said. “The overall exact number [the performance of markets] I’m not sure. I don’t think we’ve seen the highs for the year, but the lows are a long way down.”
His comments come as both France and Spain reported a rise in inflation, beating forecasts.
In the US, stocks have fallen this month as investors have grown concerned that the strength of the economy might require higher interest rates, with the Federal Reserve’s preferred measure of inflation rising more than expected in January.
Ellis made the comment as shares in the group surged on better than expected full-year results. Man, which manages $143.3bn in assets, reported an 18 per cent rise in pre-tax profit to $779mn for last year, above analysts’ forecasts.
That was driven by a 37 per cent jump in performance fees, much of which came from the group’s computer-driven macro funds. Client inflows for the year were $3.1bn.
Man’s shares rose 8 per cent to 264.9p.
The results follow a very mixed year for the $3.8tn hedge fund industry. While macro managers and quant funds following market trends made big gains in 2022, many equity traders were hard hit by a sharp sell-off in highly valued technology stocks.
Ellis said Man was hit by $3bn of outflows from UK defined benefit pension plans in the fourth quarter of last year, about half the total assets that the group runs for such clients, although it reported $400mn of net inflows overall for the quarter.
Such pension funds were racing to sell liquid assets and raise cash in order to meet margin calls on derivatives in their liability-driven investment strategies during the UK’s gilt market crisis. Ellis said “a bunch” of that money had since come back into Man’s products.