Opalesque Industry Update - Fixed income markets faced some pressure in October as investors
fret about less accommodative monetary conditions going forward. On
the one hand, the Fed is increasingly likely to hike rates in December,
while on the other hand, other central banks shifted to a less dovish
stance. In that regard, 10-year bond yields rose by 23 bps in October in
the US, supported also by buoyant economic data. In Europe, rumours
of QE tapering pushed long-dated yields higher (+28 bps for the 10-year
Bund). The rumours ended at the Oct 20 ECB meeting when President
Draghi supported neither a program extension nor a tapering scenario. In
the UK, 10-year Gilts soared (+50 bps) as the decline of the GBP
revived inflation fears amidst “hard Brexit” angst. Expected divergence in
monetary policies led the USD to appreciate against major currencies
(+2.3% vs EUR, +3.4% sv JPY, +5.6 vs GBP). Global equities reflected
currency swings. European equities outperformed US and EM markets.
Finally, the unexpected jump in US crude oil stocks led oil prices to
collapse at the end of the period. Brent oil prices closed the month at
$48/ bbl. As a result, European high yield credit outperformed US HY. In that context, the Lyxor Hedge Fund Index enjoyed healthy returns fuelled by the stellar performance of the Global Macro and Fixed Income & Credit Arbitrage strategies. On the contrary, Long Term CTAs detracted from the overall performance due to their long positioning on fixed income. Global Macro signed its best monthly return since February 2008. In a single month, the strategy erased year-to-date losses thanks to shorts on the GBP and the EUR vs USD and short positions on fixed income. The depreciation of the GBP led 10-year Gilts to surge, which was supportive for shorts on UK bond duration. Yet, dispersion in fund returns remained significant. For managers investing in equities, their preference for European and Japanese equities was a significant source of gains. Credit Arbitrage managers performed well, supported by the rally in high yield credit. Asian managers benefited from their positions on energy and banking names. Fixed Income players decently navigated the rising bond yield environment thanks to shorts on European bonds, as yields surged on the back of ECB tapering fears. The L/S Equity strategy ended October in positive territory. However, fund returns were disparate across regions. In Asia, managers’ preference for cyclical sectors helped them outperform their peers as value names performed strongly. In the US, managers adopted a cautious stance ahead of the US elections. They shaved off their market beta and increased their tilt toward defensive sectors. Long net exposure to Financials, Technology and Energy allowed them to generate strong alpha. On the flip side, European funds increased their positions on cyclical sectors, especially in Financials and Basic Materials. After a strong rebound in September, Event Driven managers lost some ground. Special Situations managers suffered from the volatility spike at the end of the period. The healthcare sector was the main culprit with long investments in Allergan, Baxter and Shire as the main detractors. Additionally, Merger Arbitrage funds suffered from the widening in deal spreads (Syngenta/ ChemChina, St. Jude Medical/ Abbott Labotaries, RiteAid/ Walgreen). Ahead of the US elections, they remained cautiously exposed, waiting for greater political clarity before deploying their capital. They have reduced their net exposure to equities. The opportunity set for cash deployment remains large as M&A activity has reached all-time highs in October. CTAs suffered a drawdown in October, as the positive correlation between equities and bonds weighed on Long Term models’ returns. Their aggressive longs on German and UK bond duration were particularly detrimental. However, they shaved off their positioning over the month while short-term models turned neutral, allowing them to better navigate the rising yield environment. In aggregate, CTAs rebalanced their commodity portfolios extensively. In the FX bucket, models continued to strengthen their long USD allocation vs EUR and GBP especially. In that regard, currency trades remained the primary source of gains in October. |
Industry Updates
Global macro signed its best month since February 2008
Friday, November 11, 2016
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