FRM Viewpoint - August 2017
- The HFRX Global Hedge Fund Index rose +0.29% in August, increasing its YTD return to +3.80%.
- Hedge funds generally had a positive month in August despite the pull-back in risk assets. The best performing strategies were Statistical Arbitrage managers, although Equity Long-Short and Managed Futures also performed well.
- Geopolitical risk increased in August as US-North Korea tensions flared and intercontinental ballistic missile (‘ICBM’) capabilities were demonstrated by North Korea.
Hedge funds generally had a positive month in August despite the pull-back in risk assets. The best performing strategies were generally Statistical Arbitrage managers, although Equity Long-Short and Managed Futures also performed well. Credit managers generally produced weaker performance.
Equity Long-Short managers held up well during the first half of August when most major markets finished in the red. They were aided by a continuation of favourable stock dispersion as crowded hedge fund longs bucked the trend and moved up notably, and crowded hedge fund shorts fell in line with markets. In terms of positioning, long exposure looks to have been extended in Asia and reduced in Europe. Activity was mixed in the US, but both Healthcare and Energy saw boosts in long exposure.
In Event strategies, deal activity remained limited though it is worth highlighting that there were a few $10Bn+ deals announced this month which has previously been positive for the strategy overall. In the meantime, Mobileye/Intel closed successfully during the month. From the universe, performance appears flat to negative on average for Event Driven strategies. Managers are slowly increasing their weight to Europe. In addition to the cross-border M&A opportunities, shareholders activism is starting to take root in Europe as several campaigns from famous activists have been announced (such as Elliott’s positions in BHP and Akzo Nobel).
Statistical Arbitrage managers had a particularly favourable month, with positive returns from futures strategies and from quantitative fundamental signals in Equities. Technical signals performed less well, but were still positive on average during the month.
In Global Macro strategies, the most anticipated macro events in August were speeches made by European Central Bank (‘ECB’) president, Mario Draghi, and Fed chair, Janet Yellen, at the annual Jackson Hole Symposium, though expectations for clarity on ECB QE tapering and monetary policy shifts were more muted in the days leading up to the event. Yellen’s speech was decidedly dovish, as the Federal Open Market Committee (‘FOMC’) has essentially made higher inflation a necessary condition for firmer forward guidance on rate tightening. As we expected, Draghi was very constrained in his comments, though his apparent lack of concern on the strength of the Euro led to the currency breaking the 1.20 level relative to the USD, a new high for the year.
Cross asset volatility remains near long-term lows despite fleeting spikes in the VIX in August, due in part to the North Korea nuclear threat. Gold made headlines as it is on track to outperform Equities for the first time since 2011. Gold call options and long gold have been staples of Global Macro manager portfolios all year.
One other wild card on the interest rates side is the impending debt ceiling deadline, which could result in a government shutdown in early October. We believe the uncertainty around resolution will likely keep the Fed neutral at their September meeting, and has caused front end stress particularly in T-bill markets with curves inverting on October bill yield spikes.
Managed Futures managers had a robust month in August. The bulk of the performance appears to have come from Fixed Income and Commodities, with FX close to flat and Equities a detractor. In Fixed Income long positions in Europe were the primary driver. Net positioning in the US was mixed at the start of the month, but the managers that we have observed are now long across almost all regions. Commodities were also notably positive, but were quite mixed across sectors. Gains were driven by long positions in industrial metals and short exposure in agricultural products. Energy was mixed, while a number of managers did well from net long exposure to precious metals.
US High Yield mutual funds and retail loan mutual funds (driven by the rally in treasuries resulting in lower demand for floating rate paper) saw outflows in August. Telecoms, Retail, Energy, and Cable and Satellite (Dish) were some of the worst performing US High Yield sectors.
Structured Credit outperformed Corporate Credit in August as most securitized products sectors, with a few exceptions like Credit risk transfer (which is one of the best performing sectors YTD) and commercial mortgage-backed securities (CMBS/CMBX), posted modest positive returns in the month. Corporate Credit managers were mostly flat to negative in August with few meaningful P&L drivers in the month. There were a handful of idiosyncratic Capital Structure Arbitrage positions (Commodity-related; long Credit vs. short Equity) that performed well in the month driven by a steep sell-off in the underlying Equities, but otherwise Commodity-related post-reorganization Equities were a drag on performance given the poor performance of the Energy sector in August. The situation in Venezuela also continued to evolve in the month with the initial US sanctions coming in better than the worst case scenario.
Summary of performance drivers by strategy
|Key:||+ Positive factors and/or drivers||<> Neutral factors and/or drivers||- Negative factors and/or drivers|
|Alternative risk premia||Trade examples1||Environmental factors|
Relative Value (RV)
|- Event Driven strategies paused in their run of positive performance ...||+ A few notable deals completed in August, including Whole Food/Amazon, Stada/Bain-Cinven and Care Capital/Sabra Healthcare …||<> Spreads generally widened and moves were further exacerbated by the tight liquidity environment …|
|+ August was a positive month for most Fundamental factor models, and performance was generally positive for a diversified model trading these factors.||- There were several common detracting positions amongst managers.||- Deal activity was seasonally pretty slow with $270Bn of new deals announced in August.|
Equity Long-Short (ELS)
|+ Valuation metrics were a key driver of returns, along with the bulk of Q2 earnings season …||+ The Euro rallied on expectations that the European Central Bank would look to end Quantitative Easing and possibly raise interest rates earlier than expected …||<> Equity markets generally finished August fairly flat, with volatility dropping back to very low levels by the end of the month …|
|- In August, the heavily shorted US Automobile sector, rallied significantly as Hurricane Harvey resulted in the destruction of over 100,000 cars.||<> Year-to-date, the modest sell-offs that have occurred have largely been tied to US political and geopolitical concerns.||+ Managers generally performed well during August, with many exhibiting positive alpha in the face of flat or falling markets.|
|+ Global convertibles were positive in August as volatility picked up …||<> US HY industry performance was mixed in August with the Utility (+0.87%; JPM) and Services (+0.63%) sectors outperforming …||+ US HY new issuance increased to $21Bn in August from July’s 18month low of $16Bn …|
|<> A late-month recovery led to modest negative returns for US HY (-0.06%; JPM) and leveraged loans (-0.07%).||<> An internet services stub gained some ground as the holding company commenced their share buyback program.||- Credit markets had a volatile start to August driven by increasing geopolitical tensions that led to a pick up volatility and a rally in treasuries.|
|+ Long positions in Emerging Market risk assets continued to contribute towards gains …||- Energy continues to be a challenging area, with managers shifting long to flat by August month end after suffering losses …||<> Following the highly anticipated Jackson Hole symposium, the USD fell on a lack of guidance from Yellen on the path of monetary tightening, while the EUR rallied as Draghi failed to comment on EUR strength …|
|<> The clear pattern that continued in August was the outperformance of Emerging Markets over Developed Markets.||+ Discretionary Global Macro managers had positive performance overall in August, with managers extracting gains through active trading in FX.||<> Geopolitical risk associated with North Korea fuelled a rally in global Fixed Income.|
The above summary is based on FRM’s opinions on performance drivers across the hedge fund industry and is not representative of the investments made by FRM. 1. The herein mentioned examples are intended as illustrations of typical investment consideration and/or strategy implementation. It should not be construed as indicative of potential performance of the fund or strategy or any investment made by the fund. It does not constitute a recommendation or investment advice or solicitation to buy or sell any particular securities and should not be considered as any investment advice or research of any kind. There can be no guarantees that similar opportunities will be available in the future or that any opportunities identified will provide similar results.
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