WTI Recovers Above $70.00 As Russia-Ukraine War Escalates

Cohen

Economic

Commodity

Russia-Ukraine Conflict

Summary:

WTI price gains momentum to near 70.25 in Friday’s Asian session.

West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $70.25 on Friday. The WTI price edges higher as an escalation in the Russia-Ukraine conflict raises the fear of crude supply disruption. The fears of a potential escalation in the Russia-Ukraine conflict fuelled the WTI price this week after Ukraine used missiles supplied by the US and UK into Russian territory. On Thursday, Russian President Vladimir Putin announced the launch of a hypersonic medium-range ballistic missile attack on a Ukrainian military facility. Putin also warned the West that Moscow could attack any country's military installations that utilised weapons against Russia, per Reuters. "The market's focus has now shifted to heightened concerns about an escalation in the war in Ukraine," said Ole Hvalbye, commodities analyst at SEB.

On the other hand, a rise in US crude inventories last week might weigh on the black gold. The Energy Information Administration's (EIA) weekly report showed Crude oil stockpiles in the United States for the week ending November 15 increased by 0.545 million barrels, compared to a rise of 2.089 million barrels in the previous week. The market consensus estimated that stocks would increase by 0.400 million barrels. Furthermore, the renewed US Dollar (USD) demand might cap the upside for the USD-denominated oil for the time being as it makes oil more expensive for holders of other currencies, which can reduce demand. The US Dollar Index (DXY), a measure of the value of the USD against a basket of six currencies, currently trades near 107.05 after hitting a fresh year-to-date high of around 107.15.

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil?

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

Source: FXSTREET

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Owen Li

Economic

Forex

Yen rebounded broadly yesterday as market participants interpreted comments from BoJ Governor Kazuo Ueda as a potential signal for a rate hike in December. Ueda noted that there is still a month before the next policy meeting and that the central bank will have a substantial amount of data to consider by then. While he did not commit to any policy changes or express a clear intention to adjust interest rates, this “openness” was well-received by Yen bulls. The mere possibility of BoJ adopting a more hawkish stance provided enough impetus for Yen to strengthen against its peers.

In contrast, Euro declined broadly, breaking to the downside against both Aussie and Loonie, although it remained range-bound against Dollar. ECB attempted to downplay the significance of the previous day’s stronger-than-expected wage growth data, which is a clear indication that they are prepared to deliver another rate cut in December. Notably, one of the known dovish members of ECB Governing Council suggested the idea of continuous rate cuts until the deposit rate reaches neutral level of 2%. While it may be premature to project policy that far ahead, it appears that some officials are already setting the stage to manage market expectations for the coming year.

Overall, for the week so far, Euro is the worst-performing major currency. Despite yesterday’s rebound, Yen remains the second weakest, followed by Dollar. Aussie is currently the strongest performer, followed by Loonie and Swiss Franc. Sterling and Kiwi continue to occupy middle positions in the performance rankings.

Technically, EUR/CAD’s fall from 1.5225 resumed by breaking through 1.4710 temporary low. Near term outlook will now stay bearish as long as 1.4888 resistance holds, and deeper fall would be seen to 1.4592 support. Firm break there would argue that the decline from 1.5225 is at least correcting the whole uptrend from 1.2867 (2022 low). Deeper fall should then be seen to 38.2% retracement of 1.2867 to 1.5225 at 1.4324.

In Europe, at the time of writing, FTSE is up 0.32%. DAX is up 0.23%. CAC is down -0.29%. UK 10-year yield is down -0.0357 at 4.438. Germany 10-year yield is down -0.035 at 2.318. Earlier in Asia, Nikkei fell -0.85%. Hong Kong HSI fell -0.53%. China Shanghai SSE rose 0.07%. Singapore Strait Times fell -0.12%. Japan 10-year yield rose 0.0269 to 1.096.

US initial jobless claims falls to 213k, vs exp 220k

US initial jobless claims fell -6k to 213k in the week ending November 16, below expectation of 220k. Four-week moving average of initial claims fell -4k to 218k.

Continuing claims rose 36k to 1908k in the week ending November 9, highest since November 13, 2021. Four-week moving average of continuing claims rose 5k to 1879k, highest since November 27, 2021.

Fed’s Barkin avoids prejudging December decision, cites vulnerability to cost shocks

Richmond Fed President Tom Barkin told the Financial Times he would not “prejudge” the rate decision at the December meeting. He acknowledged the dual challenges of elevated inflation and labor market strains.

“If you’ve got inflation staying above our target, that makes the case to be careful about reducing rates,” he said. “If you’ve got unemployment accelerating, that makes the case to be more forward-leaning.”

Barkin emphasized growing vulnerability to cost shocks which he said was higher than it might have been five years ago. He also pointed to business concerns over potential inflationary pressures stemming from President-elect Donald Trump’s proposed tariffs and deportation policies.

However, he added that Trump’s plans to boost domestic energy production could have a counteracting “disinflationary” effect.

While businesses are apprehensive about economic policy changes under the new administration, Barkin underscored that the Fed would not preemptively adjust its policy.

“We shouldn’t try to solve it before it happens,” he remarked.

ECB’s Stournaras supports continuous rate cuts until neutral level reached

Greek ECB Governing Council member Yannis Stournaras expressed strong support for further monetary easing, suggesting a rate cut at every meeting moving forward until the policy rate reaches the “neutral rate,” estimated at around 2%.

Speaking with Bloomberg TV, Stournaras described the proposed quarter-point reduction in December, which would bring the deposit rate to 3%, as the “right response” to current economic and inflation conditions.

He refrained from ruling out a larger 50 basis-point cut, and emphasized that external factors, including market reactions and the Fed’s actions, remain uncertain.

Stournaras also downplayed concerns over the sharp third-quarter rise in negotiated wages, the highest since the euro’s inception in 1999, stating, “We expect that to fall in the months to come. We thought it’s one blip but not a permanent increase.”

ECB’s Villeroy: Wage data backward-looking, advocates agile pragmatism

French ECB Governing Council member François Villeroy de Galhau, speaking at a conference yesterday, emphasized a cautious and pragmatic stance on monetary policy, downplaying the significance of recent stronger-than-expected wage data.

He described the Q3 surge in negotiated wages as a “backward-looking” indicator, primarily reflecting the “lagged effects” of earlier negotiations in Germany, which were already factored into the ECB’s September projections.

Villeroy highlighted a shift in risks, stating that the balance for both growth and inflation now tilts to the downside. He also noted that potential US tariffs are “not expected to alter significantly the inflation outlook in Europe”.

Against this backdrop, Villeroy reaffirmed the ECB’s commitment to “continue to reduce the degree of monetary policy restriction,” while underscoring that the pace must be guided by “agile pragmatism” and “full optionality” in future decisions.

BoJ’s Ueda: FX impact on economy and prices taken ‘seriously’ in policy decisions

At a forum yesterday, BoJ Governor Kazuo Ueda admitted that the central bank takes exchange rate movements “seriously” when forming its economic and inflation outlook. He also stressed the importance of understanding the factors driving current exchange rate changes and their broader implications.

On monetary policy, Ueda reiterated that decisions would be made “meeting by meeting,” based on the most up-to-date information. With a month remaining until December meeting, Ueda noted that additional data would provide greater clarity for the central bank’s deliberations.

Commenting on potential impacts from the policies of US President-elect Donald Trump, Ueda admitted that it was too hard to predict. He affirmed that “as soon as the new administration announces new set of policies, we would like to incorporate into our economic outlook.”

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 154.68; (P) 155.28; (R1) 156.04; More…

USD/JPY dips notably yesterday but stays in range of 153.27/156.74. Intraday bias remains neutral at this point. On the upside, break of 156.74 will resume the whole rally from 139.57 towards 161.94 high. On the downside, though, break of 153.27 will resume the correction towards 38.2% retracement of 139.57 to 156.74 at 150.18.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Source: MarketPulse

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Warren Takunda

Cryptocurrency

Bitcoin made snap gains on Nov. 21 as a liquidity squeeze took BTC price action to near $100,000. Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _1

Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _1

BTC/USD 1-hour chart. Source: TradingView

Bitcoin gaps higher with sellers above $100,000

Data from Cointelegraph Markets Pro and TradingView showed what trader Skew called a “pop” into final ask liquidity before the key six-figure Bitcoin BTC$97,624 price barrier.

Up nearly 3% on the day at the time of writing, BTC/USD was less than $3,000 from a historic achievement.

“If large sellers are to make a stand it’s here, also in game theory it makes sense in terms of front running $100K ask liquidity,” Skew said in a post on X.

“I think any deep sweep from here is a bid, else price will continue to go parabolic above $100K.” Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _2

Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _2

BTC/USDT 15-minute chart. Source: Skew/X

A further post noted that new ask liquidity was beginning to arrive on exchange order books above $100,000 — something notionally cathartic for price.

“New ask liquidity showing up here is a good confirmation of the market starting to price above $100K,” Skew wrote.

“Big day ahead.”

Cointelegraph has long reported on the significance of the $100,000 mark, which has come within reach more quickly than many imagined, with Bitcoin gaining 38% in three weeks.

“The normie mind cannot comprehend Bitcoin > $100K,” Charles Edwards, founder of quantitative Bitcoin and digital asset fund Capriole Investments, said.

“A ton of supply unloading between 90-100 for this reason. Teleportation occurs beyond $100K as the masses re-enter with FOMO.” Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _3

Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _3

BTC liquidations (screenshot). Source: CoinGlass

Data from monitoring resource CoinGlass put short BTC liquidations in the 24 hours to the time of writing at just over $92 million.

BTC price support retest “welcome”

A word of warning came from those hoping for a support retest to confirm market strength at higher levels.

In its latest analytics post on X, trading resource Material Indicators suggested that the low $90,000 range would be a suitable zone to revisit.

Uploading a view of the BTC/USDT order book of the largest global exchange, Binance, it noted a lack of buy-side liquidity below price should sellers gain control on low timeframes.

“FireCharts shows $BTC ask liquidity stacked from $98k- $100k, and thin bid liquidity below,” the post read.

“I’d welcome a test of local support at $91k, there’s a small buy wall at $95k that may keep price elevated and momentum high.” Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _4

Bitcoin 'Teleportation' Due as Traders Bet on BTC Price Passing $100K _4

BTC/USDT order book data. Source: Material Indicators/X

Source: Cointelegraph

Risk Warnings and Disclaimers

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Warren Takunda

Economic

At the time of writing, the GBP/USD forecast from a technical perspective looked bearish, given the shape of the candle that it was printing on its daily time frame.

Resistance between 1.2665 to 1.2731 was tested and held firm. A break above this zone is needed to tip the balance in the bulls’ favour.

Support is seen around 1.2580 to 1.2600 area, give or two a few pips, where the trend line going back to October 2023 comes into play. A breach of this trend line could pave the way for a drop to 1.25 handle.

It is worth keeping an eye on the RSI as it gets near oversold levels of 30.0. This on its own does not mean we will see a bounce back, but it does increase the odds of it happening, nonetheless. Pound to Dollar Rate Eyeing 1.25 Next Says City Index_1

Pound to Dollar Rate Eyeing 1.25 Next Says City Index_1

For now, it looks like GBP/USD’s path remains tied to the US dollar more than the GBP.

Given the prevailing bullish trend for the USD, there is little scope for significant near-term gains in the GBP/USD, even if it does appear poised for a short-term rebound amid oversold conditions.

But the dollar rally was largely left unscathed after markets were jolted yesterday by Ukraine’s use of US-supplied long-range missiles on Russian territory, with Moscow threatening a nuclear response.

Despite this, the FX market has remained relatively restrained, with the USD/JPY rising and resuming higher against other currencies.

GBP/USD investment bank consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/USD. Please request a copy here.

Markets seem cautiously optimistic, but any further escalation in the conflict could shake this complacency, particularly the euro and to a lesser degree the pound.

The pound was in focus yesterday after UK CPI data came in hotter than expected for October, rising to 2.3% from 1.7% against expectations of +2.2% y/y. Core CPI was even hotter at 3.3%.

But traders sold the initial GBP/USD rally, knowing full well that the Bank of England is more focused on services inflation, where a modest rise to 5.0% y/y still aligns with their forecasts.

Still, after the latest CPI data, it is difficult to see the BoE taking action again in December. But more easing could follow in early 2025, potentially in February, as the economy warrants looser policy.

I think that the market’s pricing of UK interest rates is far too hawkish given the state of the economy. A drop to $1.25 looks increasingly likely.

Source: Poundsterlinglive

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Risk Warnings and Disclaimers

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Warren Takunda

Stocks

December S&P 500 E-Mini futures are down -0.31%, and December Nasdaq 100 E-Mini futures are down -0.43% this morning as a disappointing revenue forecast from Nvidia and concerns about escalating Russia-Ukraine tensions dampened sentiment.

Nvidia slid more than -3% in pre-market trading after the chip giant’s Q4 revenue guidance failed to meet lofty expectations of some investors.

Risk appetite was further dampened by concerns over an escalation in the Russia-Ukraine war after Ukraine reported that Russia launched an intercontinental ballistic missile during an overnight attack.

In yesterday’s trading session, Wall Street’s major indices ended mixed. Target plunged about -22% and was the top percentage loser on the S&P 500 after the retailer posted downbeat Q3 results and cut its full-year adjusted EPS guidance. Also, Qualcomm slid more than -6% to lead chip stocks lower after Susquehanna cut its price target on the stock to $210 from $230. In addition, Fabrinet slumped over -9% after B. Riley Securities downgraded the stock to Sell from Neutral with a price target of $178. On the bullish side, Keysight Technologies climbed more than +8% and was the top percentage gainer on the S&P 500 after the company reported stronger-than-expected FQ4 results and provided upbeat FQ1 guidance.

Fed Governor Lisa Cook stated on Wednesday that it would likely be appropriate for the Fed to gradually lower interest rates toward a more neutral stance, citing progress on inflation and the strength of the labor market. She added that the “magnitude and timing” of rate cuts would depend on incoming data and the economic outlook. Also, Fed Governor Michelle Bowman said she prefers to proceed cautiously with further interest rate cuts as progress in reducing inflation has slowed.

Meanwhile, U.S. rate futures have priced in a 59.1% probability of a 25 basis point rate cut and a 40.9% chance of no rate change at the next central bank meeting in December.

On the earnings front, notable companies like Intuit , Deere, Copart, and Ross Stores are slated to release their quarterly results today.

On the economic data front, all eyes are focused on the U.S. Philadelphia Fed Manufacturing Index, which is set to be released in a couple of hours. Economists, on average, forecast that the November Philadelphia Fed manufacturing index will stand at 6.3, compared to last month’s value of 10.3.

Also, investors will focus on U.S. Initial Jobless Claims data. Economists expect this figure to be 220K, compared to last week’s number of 217K.

U.S. Existing Home Sales data will come in today. Economists foresee this figure to stand at 3.94M in October, compared to 3.84M in September.

The Conference Board Leading Economic Index for the U.S. will be released today as well. Economists expect the October figure to be -0.3% m/m, compared to the previous number of -0.5% m/m.

In addition, market participants will be anticipating speeches from Chicago Fed President Austan Goolsbee and Cleveland Fed President Beth Hammack.

In the bond market, the yield on the benchmark 10-year U.S. Treasury note is at 4.384%, down -0.50%.

The Euro Stoxx 50 futures are down -0.34% this morning as geopolitical concerns and a lackluster revenue forecast from Nvidia weighed on sentiment. Automobile stocks led the declines on Thursday. Technology stocks also lost ground. Statistical agency Insee reported on Thursday that sentiment among French manufacturers improved in November. Meanwhile, European Central Bank Governing Council member Francois Villeroy de Galhau stated on Thursday that higher U.S. import tariffs would have a minimal impact on Eurozone inflation and that the ECB should continue to reduce borrowing costs. Investors are now awaiting Eurozone consumer confidence data for November and remarks from ECB officials Elderson and Lane later in the session. In corporate news, Jd Sports Fashion Plc plunged over -12% after the sportswear retailer cautioned that its annual profit would likely be at the lower end of its forecast.

France’s Business Survey was released today.

The French November Business Survey came in at 97, stronger than expectations of 95.

Asian stock markets today closed mixed. China’s Shanghai Composite Index (SHCOMP) closed up +0.07%, and Japan’s Nikkei 225 Stock Index (NIK) closed down -0.85%.

China’s Shanghai Composite Index closed marginally higher today. Software and financial stocks outperformed on Thursday. Automobile stocks also advanced after state media Xinhua reported that China intends to extend car trade-in incentives through 2025 to stabilize market expectations. Still, sentiment remained largely subdued after a Reuters poll of over 50 economists suggested that the U.S. could impose tariffs nearing 40% on imports from China early next year. Such a move could potentially cut growth in the world’s second-largest economy by up to 1 percentage point. China kept its benchmark lending rates unchanged this week, as anticipated, but investors continue to hope that Beijing will implement additional stimulus measures to bolster economic growth. In other news, four out of six economic advisers interviewed by Reuters recommended that the Chinese government set a 5% economic growth target for 2025, while one suggested a target above 4%, and another proposed a range of 4.5% to 5%. The advisers, who do not have decision-making authority, will submit their recommendations to the closed-door annual Central Economic Work Conference in December. In corporate news, CCOOP Group surged about +10% after announcing plans to acquire a 51% stake in retail company Beijing Xinhezuo Commercial Development for 1.51 billion yuan.

Japan’s Nikkei 225 Stock Index closed lower today, with sentiment dampened by the outlook for the AI-chip sector and concerns over the escalating conflict between Russia and Ukraine. Real estate stocks led the declines on Thursday. Chip-related stocks also weighed on the index following Nvidia’s lackluster revenue forecast. Ministry of Finance data showed on Thursday that foreign investors bought Japanese stocks for the eighth consecutive week, drawn by a weaker yen and guidance upgrades from major domestic lenders. Foreigners made net purchases of Japanese stocks totaling 127.6 billion yen ($823.5 million) during the week ending November 16th. Meanwhile, Bank of Japan Governor Kazuo Ueda stated on Thursday that the central bank considers the potential impact of a weak yen on its price forecasts, although currency market stability is not part of its mandates. In other news, public broadcaster NHK reported on Thursday that Japan plans to allocate 13.9 trillion yen ($89.7 billion) from its general account to finance a new stimulus package aimed at alleviating the impact of rising prices on households. In corporate news, Tokyo Gas climbed nearly +5%, extending yesterday’s gains after activist investor Elliott Investment Management disclosed in a regulatory filing that it had taken a 5.03% stake in the company. Investors are now awaiting Japanese inflation data, set to be released on Friday, which is expected to provide further insight into the monetary policy outlook. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed up +11.66% to 26.15.

Pre-Market U.S. Stock Movers

Nvidia slid more than -3% in pre-market trading after the chip giant’s Q4 revenue guidance failed to meet lofty expectations of some investors.

Snowflake soared over +21% in pre-market trading after the company reported better-than-expected Q3 results and raised its full-year product revenue guidance.

Source: Barchart

Risk Warnings and Disclaimers

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UBS

Economic

The word diversification is about as ambiguous as is the word risk. When told “don't put all your eggs in one basket,” we quick-wittedly reply “What kind of eggs? How many baskets? What kinds of baskets? Which eggs in which baskets?”

We label this the problem of the three ‘R's’ – replication, risk reduction, and representation. Diversification has multiple dimensions, and the term is frequently used imprecisely to mean only one of its several facets.

The importance of diversification is even more pronounced in alternatives, particularly in the segment for multi-managed portfolios such as hedge funds and real estate. Diversify too little, and your portfolio misses attractive opportunities while suffering a painful drawdown.

Diversify too much, and your portfolio becomes an unmanageable, index-like vehicle with no alpha. Yet diversification as a concept is in a state of ever-changing evolution. New asset classes, new investor dynamics, and changing world financial markets all point to a different quality for diversification today than in the past. It is time for a rethink on the topic, a ’Diversification 2.0’, a new prototype managing the three Rs in the post-COVID world. Our views combine both recent academic as well as practitioner experience related to multi-manager, multi-asset alternative investments.

Diversification challenges for multi-managed portfolios

The appeal of non-traditional investments is straightforward. Real estate, hedge funds and other alternatives offer the potential for returns uncorrelated to equities and bonds, thereby reducing overall portfolio risk while isolating potential sources of alpha.

Funds of hedge funds (FoHF) and multi-manager real estate programs (MMRE) offer investors additional benefits including potential exposure to otherwise inaccessible managers, markets and strategies. FoHFs endeavor to secure capacity with the most successful traders and build portfolios spanning disparate directional and arbitrage strategies. MMREs take pride in potentially providing unique inflation protection (as rental income typically grows in line with price appreciation), new sources of income (through rents paid by occupants leasing properties) and capital appreciation (via active management).

As pooled investment vehicles, both MMREs and FoHFs seek to negotiate preferential fees, terms, transparency and investment conditions for their clients; design both commingled and bespoke offerings; hand-craft desired outcomes through aggressive side-letter negotiation; offer potentially favorable terms as cornerstone investors in new launches; and opportunistically join in co-investment opportunities with their network of submanagers. With these capabilities, MMREs and FoHFs endeavor to address the three R's of diversification by reducing risk, broadening access, and capturing market traits.

Yet markets and economies evolve over time, as does the nebulous concept of diversification. Long gone are the days when one could simply throw money at a handful of asset classes and geographies to create a diversified product. FoHF and MMRE specialists must grapple with changing geopolitical and financial market regimes to access alpha and reduce risk.

Indeed, the era of low interest rates, low inflation, low regulation, low global market volatility and negative correlation between bonds and equities is gone: the COVID crisis marks the turning point. Climate change has had significant impact on real estate investments and MMREs. In addition, the rise of passive investing (including rules-based) has also increased pressure on hedge funds and FoHFs.

FoHFs have also seen increased competition from multi-platform firms that combine different strategies run by in-house portfolio managers. Such multi-strategy shops can offer comparable diversification while reducing overall fees.

Consolidation has occurred as investors have reallocated to single-manager funds or else withdrawn entirely from these alternatives. According to Hedge Fund Research, the FoHF industry has experienced net outflows every year since 2008, totaling nearly USD 340 billion (see Figure 1). One might conclude that investors may have sacrificed some multi-manager diversification in favor of a different set of single-manager risks, ostensibly to improve performance.

With Intelligence Limited puts out a semiannual “Billion Dollar Club” survey of FoHFs with over USD 1 billion in assets. In the past few years, the number of FoHFs making the cut has dropped from 65 to 58, and the “Super League” (FoHFs with over USD 10 billion in assets) similarly has reduced from eighteen to fourteen. Consolidation has resulted in market share of the top ten largest FoHFs in this survey growing from 54% to 61% (see Figure 2).

Multi-managed portfolio teams fight back

It is our opinion that in the era leading up to and following COVID, sophisticated institutional MMREs and FoHFs have fought back in several ways to regain alpha and expand the benefits of diversification.

First, MMREs have broadened their reach into new market structures. For example, we believe the most successful MMREs have found ways of connecting retail clients with private market allocations – long the province of only institutional investors due to scale, access and informational asymmetries. Such private market opportunities offer higher return potential, lower correlation with public equity markets, inflation protection and exposure to harder-to-access markets and strategies. As transparency and the availability of data in these semi-liquid structures have improved, regulators have allowed greater access to non-institutional investors, which MMREs have facilitated.

Second, we have observed that leading MMREs have expanded their holdings to include those that would be difficult or impossible to replicate in the open market. For instance, providing unlisted real estate solutions means that non-institutional investors can benefit from the MMRE's network. Portfolios can be constructed via multiple routes, such as unlisted funds, co-investments, recapitalizations, and secondaries that are selected by an MMRE and actively positioned within guidelines agreed with the clients. Diversification is amplified as investors do not face the risk of individual funds or managers.

Third, FoHFs have embraced new sources of diversification and alpha in the form of alternative risk premia, ESG, generative AI, digital assets and other niche opportunities. Moreover, we have seen how leading FoHFs have morphed into ’solution providers’ and blurred the boundary between internal and external trading. Most notably, some FoHFs now include a range of tactical co-investment opportunities where the FoHF teams up with individual hedge funds in their network to pursue tactical ideas.

Multi-managers look at many facets of diversification

Any standalone investor can compute a basic ’benefit of diversification’: calculate the portfolio’s overall expected variance using returns, variances and covariances of the underlying holdings. Now compute the same but assume all holdings have a correlation of one to each other. Subtract the latter from the former and presto… the wonders of diversification.

While this all looks pretty on paper, it ignores some irksome questions. What if all correlations go to one? Is portfolio variance the correct measure of risk? Why only consider a single point in time? In our opinion, risk managers in a FoHF can delve deeply into the three Rs by exploring a much broader concept of diversification measures.

Name diversification: Academics tend to focus on risk diversification whereas practitioners are usually more concerned about holdings diversification, i.e., the number of unique line items in a portfolio.4 For bonds, this could suggest either issue- or issuer-related groupings; for equities, individual company names; for FoHFs, number of underlying funds and firms. Holdings diversification suggests protection against outliers or concentration risk, even reputation risk. A basic measure of name diversification is the Herfindahl Index (HI), which measures diversification on a scale of zero to 10,000. The higher the number, the greater the concentration risk and risk of single-name failure.

Tail-risk diversification: Alternatives differ from traditional investments in countless ways. They often exhibit properties of skewness (asymmetry between wins and losses) and kurtosis (excessive performance in the tails and center of the distribution). In the traditional case, mean-variance models are concerned with covariances, i.e., the behavior of pairs of assets. To improve diversification in the presence of skewness, one must look not only at each individual holding and each pair of holdings, but also every triplet of holdings. Diversification accounting for kurtosis requires examination also of every quartet of holdings. We humans are not wired to think in such higher dimensions.

Liquidity diversification: Sophisticated risk management plans can be designed for market crises where liquidity dries up, causing potential asset-liability mismatches. For mutual funds, this could lead to regulatory risk. For hedge funds and other alternatives, illiquid situations may result in reputational risk, compelling managers to institute gates, withhold redemptions or make inglorious payments-in-kind of non-tradeable assets. Liquidity diversification also encompasses the deeper topic of mismatches between contractual liquidity terms and the underlying liquidity of one's subadvisors.

Capacity diversification: FoHF allocators compete with one another for scare capacity. A newly launched hedge fund, or a veteran who is accepting new money, will only entertain a fixed amount of capital inflows. Similarly, rookie managers who may be the superstars of tomorrow may take on early investors and close their shop permanently to new subscribers. Capacity diversification involves game theory: how much capacity is needed now to diversify our portfolios in the future?

Too few cooks in the alternatives kitchen

Academics and practitioners have debated endlessly the question concerning the optimal number of holdings needed to diversify a portfolio adequately. The controversy stems back to the dawn of modern portfolio theory. In this ivory tower world, investors live in a mean-variance world of normal distributions where they face neither transaction costs nor liquidity constraints. Authorities including Evans & Archer (1968), Fama (1976), Elton & Gruber (1977), and Reilly (1985) mandated that a mere 10-20 stocks are sufficient to eliminate 95% of the variability in an equity portfolio. This view has unfortunately spread and influenced beliefs about other non-traditional asset classes.

We know that hedge funds, real estate and other alternatives investments are different. Besides skewness and kurtosis, these asset classes often report serial correlation, meaning present returns are not random but may be influenced by the past. Many such funds are much less liquid than theory allows: some may suspend payouts, suffer blowups, fraud or other unfavorable ’headline’ risks. Most critically, certain alternatives do not lend themselves well to standard benchmarks: they are considered ’absolute return’ vehicles.

A litany of early scholarly articles concerning FoHFs argued that a compact portfolio of 10-20 funds was more than sufficient to meet the needs of diversification. However, time and experience have revealed that these studies were misguided and flawed. We have issues with their methodology, data problems, biased historical time frame and an inadequate definition of risk. These researchers fell into the trap of the three Rs, as they confused diversification with only replication, ignoring the dimensions of risk reduction and representation. Diversifying the Diversifier_3

Figure 4 illustrates a Monte-Carlo study in which we created equal-weighted portfolios consisting of one through 80 hedge funds. Each portfolio was the average of 2,500 simulations sampled from a universe of 10,000 time series.

We first assumed returns were normally distributed. The results suggest that only fifteen hedge funds can diversify away most portfolio volatility: further, the marginal benefit of reducing a potential drawdown is limited after 20-25 funds. However, when we reran the study assuming fat-tailed returns, the results were strikingly different. The speed of risk reduction was slower, and absolute losses were severe for portfolios with small numbers of holdings. Under certain crisis circumstances, it may be desirable to have 60 or more funds in a broad-mandate portfolio to mitigate the potential for a substantial drawdown.

Diversifying the diversifier

Recent academic research disputes a key tenet of modern portfolio theory apropos diversification; namely, we have been wrong all along to forecast risk using a static correlation matrix. Experience and analysis show this leads to trouble when faced with a major upheaval such as seen in 2008 or COVID in 2020: correlations tend to rise in the left tail of a distribution and fall in the right tail. As such, diversification is less effective in a risk-off tape, while conversely, investors sacrifice some upside due to diversification in a risk-on environment.

In an example of an approach to address the issue of changing correlations, Vatanen (2024) proposes a multi-asset framework for asset allocation including listed equities, private assets, diversifiers and tail hedges. This framework, though comprehensive, seems expensive to implement.

Instead, we believe savvy MMRE and FoHF managers already do the work for the investor, by incorporating both bottom-up and top-down analysis into portfolio construction. This suggests that multi-manager solutions are not bound by fixed schemes for investing across strategies but rather may move in and out tactically as the situation demands. For the complete investor, a well-designed asset management firm that offers various products, including both traditional and alternative, single-manager and multi-manager, can guide an overall portfolio into different fund vehicles. This will effectively diversify the diversifier and satisfy the requirement of the three Rs: replication, risk reduction, and representation.

The three Rs for multi-manager alternatives

For many market participants, diversification works until it does not. This is partly the result of an inadequate appreciation of the multiple facets of diversification: replication, risk reduction and representation.

MMREs and FoHFs offer opportunities for alpha and uncorrelated returns in normal markets but must adapt in the post-COVID era. This includes building portfolios that address many other forms of diversification; incorporating new strategies and asset classes; and evolving from static allocators to dynamic, tactical and opportunistic fund management. In this way, shrewd multi-manager alternative programs can embrace Diversification 2.0 and prosper in the uncertain times ahead.

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Just when inflation was starting to get (dare I say) boring again, the potential for higher tariffs, a central element of the incoming Trump administration’s agenda, has reignited concerns about inflation. With the much-anticipated Federal Reserve easing cycle just underway, markets must now consider the potential consequences for monetary policy if disinflationary trends were to reverse.

We can look to Trump’s previous term for insight into the Fed’s approach to inflationary pressures from tariffs. In September 2018, the Fed modeled a scenario involving a 15% tariff on all non-oil imports with foreign economies responding in-kind. If the Fed reacted to the resulting inflation spike by raising rates, they projected a mild recession. Conversely, if the Fed looked through the rise in import prices, growth slowed to a mere 0.5% but a recession could be avoided. The Fed concluded that this “see through” response would be most appropriate. However, if inflation expectations rose, which would be more likely in a very tight labor market, then the preferred response could be to hike interest rates.1

More recently, Minneapolis Federal Reserve Bank President Neel Kashkari shared a similar perspective, describing tariffs as a one-time increase in prices that is not inherently inflationary in the long term. However, he warned that a “tit-for-tat” trade war could exacerbate inflationary pressures, sending prices higher.

Today’s economic environment differs meaningfully from 2018—while the inflation heatwave is mostly past us, its embers are still alive.

Recent events have reminded companies of their pricing power, and workers are now more attuned to cost-of-living increases in wage negotiations.Although market-based long-term inflation expectations are anchored around 2.0%, consumer expectations have hovered around 3% since May 2021, half a %-point higher than their range in 2018-19.2 The recent experience of being slow to respond to “transitory” pandemic-related inflation may prompt FOMC members to adopt a more cautious approach to rate cuts next year, especially in the context of resilient economic growth.

Additionally, several other trade war effects could influence the economy, such as slowing global growth, declining productivity and policy uncertainty weighing on business investment, all of which add complexity to any tariff projections. Investors should also be wary of placing too much emphasis on any specific cabinet appointments. Regardless of whether the incoming administration is staffed with tariff “hawks”, the former President has a track record of initiating trade negotiations with large, ambitious demands that are ultimately whittled down, and look significantly different, to the final agreements.

While it may be premature for the Fed to incorporate tariff implications into monetary policy decisions, current data on resilient growth, healthy labor markets and other factors suggest that the Fed's path will be gradual, possibly settling at a higher level than their latest projections indicate. For bond markets, this, along with the impact of higher deficits, could keep long-term yields elevated in the year ahead.

A tariff inflation spike will depend (amongst many things) on the degree of retaliation.

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WTI Oil FAQs

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BTC/USDT 15-minute chart. Source: Skew/X

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Diversifying the Diversifier

Diversification challenges for multi-managed portfolios

Multi-managed portfolio teams fight back

Multi-managers look at many facets of diversification

Too few cooks in the alternatives kitchen

Diversifying the diversifier

The three Rs for multi-manager alternatives

Could Higher Tariffs Reverse the Fed's Easing Course?

Today’s economic environment differs meaningfully from 2018—while the inflation heatwave is mostly past us, its embers are still alive.

A tariff inflation spike will depend (amongst many things) on the degree of retaliation.

Risk Disclosure