Volatility, changing market sentiments and market neutral strategies 

eVestment Hedge Fund Asset Flows Report found that 42 per cent of the managers were able to raise new capital in the last year; many fund managers declared the year to be the most challenging, and overall, the winners in the year were the Market Neutral Equity Funds, where investors added $12.52b during the year. 

The other top-performing strategies included the Macro funds ($6.74 b) and the MBS strategies ($8.01b). Market-neutral strategies use arbitrates, which can benefit from long positions with short positions. 

The goal is to get a market-neutral - where the correlation approach between the long and short helps determine their positions. Such strategies generate profits primarily based on the price movement of the stocks. Equity market neutrality is a defensive tool when harsh reversals hit the market.

Analysts scrutinize the warning signs as the market is up-trending 

The fourth quarter of 2018 was marked by enormous volatility, which could be great for long/short fundamental strategies. 

The slowing global growth, inflation, and high-yield corporations may come under pressure in cyclical industries, where experts expect the cycle to remain peculiar due to the flexibility afforded to the companies in borrowing in the loan markets. 

Trade negotiations with the US have hit China’s growth, and the Brexit deal may prove to be an issue for the UK while the US is renegotiating trade deals with partners, creating unpredictability in the global trade supply chains. 

Some believe 2019 may have several catalysts for volatility where credit indices imply the default rate to be 3.3 per cent for the US high-yield companies. 

These are the situations when the global macroeconomic environment is full of risk catalysts like economic slowdown, cold war or Brexit. 

One of the biggest risks in the current market is the violent market reversals. The correlation between high-yield bonds and the S&P 500 can be used to measure the market sentiments and get the risk on/ risk off–forecaster of volatility. 

Some believe the tremors of October and December were just a warning sign that could intensify in the current year or the next year. 

When the trend line breaks, it indicates the potential future moves up or downs, and it has been used as a predictor earlier, but in February, the trend line broke. The market continued to show an uptrend, which many analysts consider a troubling sign. 

Aggressive trends 

Some aggressive trends in the market may be introduced in 2019 with higher bond evaluation where the equity market neutral can serve as a middle ground with the marco-tail risk. 

Global macro investment is sometimes linked to long volatility strategies, which can incorporate tail risk protection to promote diversification and downside protection. 

At times of higher volatility, the weather funds gain popularity, which includes the long/short positions allowing the buyers to purchase the investment, which they perceive as advantages, and they may sell depreciating short securities. 

Whether funds can take long or short positions depends on changes in the market conditions.