By Marc Gamsin, Greg Outcalt – Alliance Bernstein

Success for most alternative strategies depends largely on producing returns from alpha—sources beyond broad market movements. It’s been harder to do that in recent years, but that could change in 2017.

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Alternatives

A number of factors worked against alternative returns last year, including a stricter regulatory environment and low interest rates. And after the US election, volatility faded and equity markets rose steadily, making exposure to broad market moves—or beta—a winning strategy.

We don’t think this state of affairs will last indefinitely, though. Here are some of the bigger trends we see taking shape that could drive results this year and beyond for alternative investments.

Short-Selling Potential on the Rise

We saw increased dispersion last year among individual stocks, forcing investors to differentiate again between weak and strong investments. This should improve short-selling opportunities for equity hedge strategies.

In recent years, a flood of monetary stimulus from major central banks has ended up lifting all boats—even the least seaworthy ones. That has made uncovering long/short potential in global stock markets a challenge.

Today, central bank policies are diverging. The Federal Reserve has already started to raise interest rates, with more hikes likely in 2017. This environment could make things difficult for some companies, industries and asset classes. And while central banks in Japan and Europe are still easing aggressively, the effect of their policies on financial markets has been fading somewhat.

Periods of higher interest rates also mean managers can earn a higher yield on the cash balances that result from successful short sales, providing another potential return boost. Rising-rate periods have historically been profitable for equity long/short strategies and active managers in general.