In an environment marked by low interest rates and relatively low volatility, Chris Manser, AXA IM’s Global Head of Fund of Hedge Funds, highlights three interesting hedge fund strategies for the year ahead.

1. Event driven equity strategies will benefit from an increase in corporate activity. Corporate cash levels have been increasing and many companies are looking to deals in order to grow. With a likely increase in M&A and re-leveraging activity, it’s a favourable environment for event driven strategies and this is likely to persist in the medium term. For investors uncertain about where the market is going, this strategy offers equity exposure without requiring them to make a directional call.

2. The mortgage backed securities market looks attractive on a fundamental basis. From a technical perspective, a very steep yield curve and potential further slowing of prepayments provide a strong backdrop. New investors looking for yield are entering the space and also supporting valuations. The potential for policy changes requires experienced managers who are actively managing their risks.

3. Tail risk has become a popular approach for new funds. The crisis has greatly changed the market’s appreciation of extreme events, and there is a sense that further occurrences are not fully priced in. In the current environment with elevated levels of tail risk, these funds allow the construction of portfolios which can benefit from further market recovery whilst minimising the risk of significant draw-downs.