Sell in May and go away? Why some hedge funds are looking forward to this summer
Some investors swear by the well-known adage “Sell in May and go away”, given that it’s a month that can bring low trading volumes, thin liquidity and, even worse, a stock market sell-off that permeates over the summer.
Will this year be any different? Is it worth just going on holiday until St Leger Day, the horse race in September which often signals the end of the summer lull? Some of the best-performing hedge funds gathered last week at the Investors Choice Awards, and they signalled that, on the contrary, the next couple of months could be lucrative.
“I believe the famous ‘sell in May and go away’ [theme], statistically, has proven to be right historically,” said Stefano Prosperi, chief executive of Kairos. “This year we started on the wrong foot, the markets surprised a lot of us with the correction we’ve seen in the first quarter, especially in the first month and a half. Maybe this year will be a little bit different in the summer.”
One hedge fund is particularly bullish on European stocks, warning those who opt to soak up the sun could sacrifice portfolio gains. “Unfortunately we’ll have to work through summer!” said Rudolf Bohli, chief executive of RBR Capital, in jest. He also pointed to the front-loaded sell-off in stock markets this year as a reason why summer will be strong, alongside the timing of the Brexit referendum on 23 June, which global managers cite as a major portfolio risk, and the latest endeavours to fix Greece.
“If there is a solution in Greece and Brexit is behind us, European markets could rally 20 per cent from here.” Bohli said buy European stocks and Greek banks, and added that activist ideas will do well in this market. “Switzerland is too defensive, Germany is going to do well, Greece, that’s a little bit smaller in terms of market cap, but that is definitely going to go through the roof,” he said.
Credit and volatility may also provide a rich hunting ground over the summer. Martin Hornbuckle, managing director of Napier Park, said “sell in May and go away” has not been a particularly good strategy on credit markets.
“The summer markets have seen some interesting times in recent years. We often see a lot of supply in June and July and, if the market is weak, then we prefer to be a buyer. This year we’re still at a point in structured credit markets where we are recovering from a weak first quarter, so there is still plenty to go for and the new issue market in leveraged finance is picking up,” he said.
Jonas Stark, chief executive of Blue Diamond, who trades volatility, said summer actually contains some of the better trading months and it’s year end that performs badly. “December was terrible for liquidity, summer is usually not so bad. It’s depressed volatility but liquidity for what we do is good.”
But others dismiss playing the seasonals. Harald James Otterhaug of Oslo Asset Management – the winner of the Investors Choice Awards 2016 – places short and long positions on energy equities regardless of the time of year.
“We don’t believe in those type of seaonalities. We try and buy cheap stocks and sell expensive stocks,” he said.
Many investors are on his page and deride the theme as a catchy saying with little merit. Long-term investors hate the idea of timing the market and some hedge funds agree that individual strategies work better for their portfolios.
“We focus on the names we like. We see valuation in a number of sectors and names throughout Europe and emerging markets. I don’t particularly time these things,” said Joseph Oughourlian, co-founder of Amber Capital, an event-driven hedge fund.
Given the choppiness on stock markets, with wide ranges but slim overall returns, combined with a low yield environment globally, staying around for summer to fatten up portfolio gains seems like an appealing prospect.