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Market-neutral equity – a replacement for fixed income?

“I advise my clients to use market-neutral funds as a replacement for fixed income funds,” says Jaakkola. “Market-neutral gives a higher yield than bonds.” The funds he has picked for his clients target a return around Libor plus 4. “There is a big demand for such funds.”

Jaakkola himself believes a return of Libor plus 2 to 5 is realistic. “So more or less the same as bonds in the old days.”

Adding more equity market risk to increase return potential is not really an option for him. “Equities have been so shaky of late. My clients don’t want to add anymore.”

Great Rotation?

Jaakkola’s institutional clients now have an allocation of about 10% to equity market-neutral equity funds. But the low yield environment has triggered a sort of Great Rotation from bonds to market-neutral equities, he believes.

“The portfolio allocation to market-neutral equities could grow to 30 to 40%,” says Jaakkola. “I don’t know when it will happen, but we are going that way.”

Part of the Bonhill Group.