The busy capital markets could become a turning point for hedge funds in the second half of the year, especially in the event driven, macro and long/short equity divisions, says Deutsche Bank.

Capital markets activity, as measured by initial public offerings, merger and acquisition and debt issuance, is on its way towards a record year. The private wealth management arm at the German bank believes the prospects for its strategies are intact, despite disappointing performances in the first half of the year, as hedge funds should be able to capitalise on the capital markets movement.

Corporations are currently boasting balance sheets rich with cash, which Deutsche Bank thinks are likely to be used for acquisitions. The flexibility of event driven funds to engage in mergers and acquisitions, credit and special situations make them ideal for busy capital markets environments, the bank argues.   

Macro hedge funds have historically thrived in periods of dislocation and transition of high risk premium environments. Deutsche Bank thinks the case for macro strategies are strengthened by the completion of the second round of US quantitative easing and the approaching target compliance date of BASEL III.  

The second round of US quantitative easing was wrapped up in June and by then had seen the Federal Reserve buying 80 per cent of each new treasury issuance on average since its beginning in the fourth quarter of last year.

BASEL III, the new international regulatory standard on bank capital adequacy and liquidity, seeks to make all financial institutions in the G20 fully compliant by the end of the year.

Finally, Deutsche Bank forecasts that the general dispersion will continue and recommends long/short equity on that basis. Stock pickers who can identify value and competitive persistence while managing their systematic risk should be able to keep tracking down alpha in the market.