HSBC Private Bank is keeping its highest conviction overweight position in hedge funds, as it thinks the current environment calls for active management. Within this asset class, it likes discretionary macro and equity long/short strategies due to pricing anomalies which have developed over the last two years.

Last year, the main challenges for managers were the high correlation between asset classes and significant swings in risk appetite – both signs of investor uncertainty – says Willem Sels, UK head of investment strategy at the firm. However, the likeliness of a double-dip recession is fading, along with the prospect of deflation, and fundamental analysis will become more important, he says.

In terms of which strategies the bank likes, its highest conviction position is with the discretionary macro strategy, as interest rate and currency strategies can profit from macro uncertainty, says Tim Gascoigne, global head of portfolio management at HSBC Alternative Investments.

Meanwhile, the private bank also likes equity long/short strategies, as it says the equity markets have been driven by sentiment over the last two years, creating opportunities from mispricing.

“In our view, as and when the environment changes and individual stock prices reflect more closely the fundamentals of these companies we expect to see outsized returns from equity long/short strategies that adopt a more fundamental and value-oriented approach,” said Gascoigne.

There are also potential prospects in merger arbitrage, says HSBC, as opportunities for organic growth remain limited (due to consumer deleveraging) and cost-cutting opportunities are “exhausted”.

“In addition, we believe that the maturity calendar from 2011 to 2014 for many debt issues will create opportunities for managers in catalyst-dependent relative value credit trades,” added Gascoigne.