FRM Viewpoint - September 2017
- The HFRX Global Hedge Fund Index rose +0.60% in September, increasing its YTD return to +4.42%.
- Overall September was a positive month for Discretionary Global Macro managers, which generally benefited from the global yield sell-off, as many still held shorts in Developed Markets Fixed Income.
- Equity Long-Short managers experienced a month of two halves, with Momentum trades in Growth stocks continuing to perform through the start of the month, before Value recovered through the second half of the month.
September was a mixed month for hedge funds as the sell-off in Bonds through most of the month led to losses for CTA managers and the repricing of valuations in Equity markets. Event strategies generally did better, as did Value focused Equity Long-Short and Credit, but Statistical Arbitrage suffered.
CTA managers primarily saw losses in their long Fixed Income positions, but sideways markets in other asset classes meant that there were few contributors across many managers’ portfolios. Managers continue to watch for positive correlation between Equities and Bonds, which has historically been a negative sign for CTAs as managers reduce risk in concert, in similar trades.
Equity Long-Short managers experienced a month of two halves, with Momentum trades in Growth stocks continuing to perform through the start of the month, before Value recovered through the second half of the month. European managers generally fared better than other regions, as the rise in 10yr rates from close to zero in Germany led to more rational pricing behaviour (and there hasn’t been the same level increase in Tech valuations in Europe as we have seen in the US).
Statistical Arbitrage had a difficult month in September, ending what has been a favourable run over the summer. Fundamental strategies had a poor month across regions, with a mini factor rotation seemingly occurring – there have been encouraging returns from Value, while Quality, Earnings growth and price Momentum all seemed to have reversed during the month. Technical Equity strategies performed marginally better, though there was quite a range of performance reported. Those managers with exposure to futures strategies also had a difficult month, in particular those that look more like Managed Futures strategies suffered in the Bond sell-off.
Corporate Credit managers were broadly positive driven by a rebound in long-biased positions in commodity-related Credits and reorganization Equities as well as a recovery in a number of stub trade positions which had widened dramatically in August. Within the distressed space, Seadrill filed for bankruptcy after reaching a comprehensive restructuring agreement with their various stakeholders. Exposure to Puerto Rico was a detractor for some managers as the entire complex traded off following the destruction caused by Hurricane Maria.
Structured Credit markets were mixed in September with sector spreads generally flat to wider on the month. Retail weakness continued to weigh on commercial mortgage-backed securities indices (‘CMBX’) with high retail concentration, particularly in the lower-rated portion of the capital structure. Private student loans were also softer due to regulatory actions taken against certain student loan trusts due to alleged improper debt collection practices.
Overall September was a positive month for Discretionary Global Macro managers, which generally benefited from the global yield sell-off, as many still held shorts in Developed Markets Fixed Income. Some managers also gained from bullish Renminbi (‘RMB’) positions, though timing was crucial given the reversal in the RMB in September. The USD rebound also followed on the yield sell-off, though Emerging Markets FX positioning continues to be dynamic and varied. Emerging Markets risk appetite particularly in Equities remains robust.
Deal activity was slightly subdued in September though we saw a few sizeable deals being announced which is encouraging in our view. Anecdotally we are hearing from our managers that some corporates are slightly reticent to launch takeover offers ahead of a clearer understanding of Trump’s long touted tax reform. Even post the release of Trump’s tax proposals on the 27th of September, there remains uncertainty as to how they will impact Mergers and Acquisitions (‘M&A’). As the outcome of these proposals become clearer, we believe M&A activity could improve. While we are seeing a pick-up in Private Equity deal making activity this year, managers generally remain conservative and hold limited exposure to buyout deals given the increased risk characteristics of those.
Event strategies generally had positive performance in September. Risk Arbitrage was generally a positive strategy for managers. The main drivers were three deals which have experienced much volatility throughout the deal life. Softer catalyst situations (Equity and Credit) also contributed positively to performance. In Relative Value there is still a wide dispersion of spreads/discounts/stubs, etc. There were moves in both directions during September, maybe caused by below average liquidity. Overall, Relative Value strategies ended the month down. An internet services company was a notable contributor for several managers while a media company hit another record discount to its stake in an internet company in September.
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)
|+ Risk Arbitrage was favourable and the largest P&L drivers typically originated from short dated deals ...||+ A couple of trades aimed at benefiting from the transformation of the global music industry were favourable …||- The usual September bounce in corporate activity did not really happen this year. …|
|- Statistical Arbitrage managers had a poor month driven by weak performance from fundamental factor models and from the Futures exposures||- Some longer dated deals detracted, when spreads widened||<> The volatility of merger spreads has picked up slightly this month|
Equity Long-Short (ELS)
|+ September saw a recovery for European large cap Equities …||- Shorts were generally detractors. The size and composition of manager’s short books influenced the size of their losses and their subsequent performance …||+ Equity markets were notably positive in September around the globe, with the exception of the FTSE 100, Hong Kong and China …|
|+ Several managers produced robust performance relative to their net exposures||- September saw a sell-off in Tech stocks||<> The release of the details of Trump’s tax reform bill led to a revival of the post-Election trade|
|<> Fund flows were mixed with inflows into High Yield funds and small outflows from loan funds. …||- Toys "R" Us was the only company to default in September affecting $1.4bn in loans and $800m of Bonds …||+ High Yield Credit markets rallied in unison with Equities in September …|
|- Puerto Rico Bonds across the entire complex were down sharply in September||+ Stub trades were also noteworthy performers||+ US High Yield industry performance was broadly positive in September as 19 of 21 industries posted gains|
|+ Discretionary Macro managers had positive performance overall in September …||- Gold suffered on the reversal to higher rates and USD strength …||<> Central bank rhetoric was quite hawkish in September, fuelling the sell-off in Fixed Income and the rally in the USD …|
|- Base metals reversed on profit taking from the 20%+ rallies in August||- Long positioning among Managed Futures programs in rates was the biggest detractor in September||<> Volatility in Commodity markets continued with reversals of the moves from August|
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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