Trying to predict the future can be especially dangerous when hoping to profit from investments. However, you can extrapolate from existing trends and processes and wonder out-loud whether large changes already under way offer opportunities for sophisticated investors. So although you should take the following tips with a hefty pinch of salt, many big fund managers (hedge funds or otherwise) are betting on some of the following themes.


Taking a peek at peak oil.

One of the most controversial ideas within the world of energy is called peak oil, which in simple terms looks at the rate of change in demand and supply of crude oil. Essentially, the peak oil theory holds that at a certain point the output of the world’s oil producers will hit its maximum, and from there the supply of oil will begin to decline, even as the demand rises.

If peak-oil advocates are right, the world has already reached a point where the growth in demand for black gold from emerging markets exceeds the combined increase in new supplies. In other words, the planet is starting to run out of oil reserves.

The optimism that falling supply accompanied by rising demand will cause the value of oil shares to skyrocket isn’t going to make a huge difference in the short term, but it may underpin an increasing demand for large, strategically valuable oil reserves.


Think globally.

As the world and financial markets become more interconnected, opportunities arise for smart, advanced investors. In particular, many hedge funds have cottoned on to the idea that what works in the developed world can also be adapted to work in emerging markets.

A massive growth has been observed in long/short strategies in countries such as China and Brazil, but now experts are beginning to see a bigger range of advanced investment strategies applied to all manner of emerging markets.

In particular, take an interest in the work of shareholder activists (who use the power of their shares to put pressure on a company’s leaders to make changes to increase share value), and value-style investors (who invest in the stock of companies they believe have been undervalued) in emerging markets.


Consider cheap tail risks.

Investors face two forms of risk:

Predictable risks: Anything from the ebb and flow of the business cycle to how macro-economic decision making affects the pricing of assets. (Note: Macro-economics analyses general economic indicators such as unemployment rates, interest rates, inflation rates, and so on, in an attempt to predict trends in the economy as a whole.)

Unpredictable risks: Categorising these risks into two additional groups creates: Events that people have some sense may happen and events that people have absolutely no idea may happen or little ability to predict.


Love volatility.

Many investors now treat volatility as one of their key long-term target asset classes for investment purposes. Most active traders move in and out of volatility on a daily or intra-day basis but some are stepping back from this frenetic trading activity and taking a more considered approach.

As markets have become progressively more globalised and synchronised (that is, responding in similar ways to events), they’ve noticed that volatility tends to switch between long periods of calm (low volatility) interspersed by short bouts of manic volatility.


Profit from future currency wars.

A slowdown in global growth produces inevitable tensions. The most obvious is found in the currency markets, where governments frequently use their exchange rates as a mechanism for boosting their domestic economies.

Assume that a nasty global recession is about to start (you remember that feeling, don’t you?). Governments are pushed to use fiscal pump priming (in effect pushing money into the wider economy) to stimulate their economies, which usually consists of spending more and taxing less. But they may not have much room for manoeuvre if they’re also trying to demonstrate fiscally responsible behaviour to the bond markets. Cue currency manipulation.

In simple terms, a weak economy may benefit in the short term from a cheaper currency, because the nation’s exporters find their internationally traded goods are cheaper. The downside is that currency depreciation increases the cost of imported goods, which depresses domestic demand; but the temptation is usually irresistible.


Illiquidity can be your friend.

In the last few years investors have been trained into thinking that liquidity is good and illiquidity is bad. When markets are constantly worried about a financial meltdown, investors need to be able to sell a financial asset in a matter of seconds and then move their cash to a safe haven promptly.

Illiquidity can be enormously rewarding in a contrarian asset (that is, one bought when it performs poorly with the expectation of selling it when it performs well) when: You’ve done your analysis properly and are aware of the risks; you believe that systemic collapse is unlikely; and you’re patient.


Take advantage of the end of traditional banking.

Banking regulators worry about liquidity obsessively and they want banks to risk less, and invest more in their equity base. As a result, lending to certain risky groups and over the very long term is deeply unfashionable, providing opportunities for patient, careful investors to step into the breach.

Many infrastructure funds are now sourcing their own funding for big new projects. Hedge funds have stepped into the international trade financing market, while other investors are looking to set up new structures that lend to small- to medium-sized businesses.

Crucially, many of these new opportunities are hugely profitable as long as you’re willing to invest time and money in understanding the risks involved and are willing to be patient and think about the long term.


Green the world.

Clean, green energy is rather unfashionable at the moment and critics are constantly attacking the core ideas of climate-change advocates.

Greening the planet starts to look difficult and expensive. But as mainstream investors retreat, opportunities open up. The green imperative isn’t going to go away, and although governments change their minds they do so in a relatively predictable way. Good profits can still be made for ‒ yes, you guessed it ‒ patient investors willing to sit tight and invest for a 10‒20-year term.