Bleak outlook means opportunity … to a point

The European debt crisis and global economic slowdown, coupled with the sluggish U.S. economy, add up to “an extraordinary and great time to be investing,” according to Bob Worthington, president of Hatteras Funds, which manages $2.2 billion in alternative investments. “If you're an adviser, this is when you make your money, because clients don't need you when the markets are just going straight up,” Mr. Worthington said Wednesday at a private gathering of Hatteras advisers. “Anyone can manage money when the markets are going straight up, but now is when the winners and losers start to separate,” he added. Hatteras manages three registered mutual funds, as well as private-equity portfolios, all with a focus on alternative investment strategies. While Mr. Worthington is a fan of alternative investing, he doesn't believe in blindly chasing alternatives for the sake of alternatives. Of the roughly 250 alternative-strategy mutual funds tracked by Morningstar Inc., 80 of which were launched just last year, Mr. Worthington said, “Three-quarters of those funds are wanna-bes.” The 7-year glitch Opportunities for advisers to shine could be hard to come by, however, according to Mark Yusko, founder, chief executive and chief investment officer of Morgan Creek Capital Management. Don't bank on another round of quantitative easing and don't expect the equity markets to do anything for at least the next seven years, he said. Stressing the significance of demographic trends that suggest the aging population is going to spend less and thus hold down economic growth, Mr. Yusko told advisers at the Hatteras Funds gathering that “'sell in May and go away' might have been good advice this year.” “You've made no return on equities for the last 12 years and you're not going to make any return in equities for next seven years,” he said. “We've never been more bullish on long-short equity.” Contrary to some analysts' suggestions that weak employment and economic growth data will lead to another round of quantitative easing, Mr. Yusko jumped to the next step and concluded that the easing will lead to inflation — and won't bring down unemployment. “No president has ever been re-elected when gas was more than $3.50 a gallon and unemployment was above 7.5%,” he said. “That's why there won't be a QE3.” Meanwhile, he said, the looming fiscal cliff will be a real and significant issue for the U.S. economy that can't be ignored. “On Jan. 1, $1 trillion worth of spending cuts will expire, and including tax cuts that will also expire, it all adds up to $1.5 trillion, which means 4% of [gross domestic product] disappears, and we're only growing at 2%,” he said. “My guess is if [President] Obama doesn't get re-elected, he will let the Bush tax cuts expire because that will be his last dig at the Republicans.”