Value has value again

Alt1_EN.PNGJanuary was a challenging month for investors. The Fed surprised the market with a statement that was more hawkish than expected, bringing forward the rate hikes and the Fed balance-sheet reduction schedule. Investor focus swiftly turned from Build Back Better (BBB) to PPP; Powell, Putin and Prices.   

The pressure on short-term rates led to an acceleration in the sell-off trend affecting expensive growth stocks initiated during the fourth quarter of last year. Most of the main equity indices declined during the month, led by technology and biotechnology, which declined by 8% to 11% over the month. The decline on European markets was more moderate due to a higher component of value stocks, which outperformed. H shares recorded low single-digit gains during the period, as the market expects less government intervention. At sector level, energy stocks were the clear outperformers, benefitting from higher commodity prices.

Rates were the centre of attention at the beginning of the year. The US yield curve flattened, adjusting to a revised rate hike schedule. Yields at the front end of the curve increased by 40 to 60 bps, while increases for maturities of 20 years and longer were modest. European sovereign yields followed the same trend.

The HFRX Global Hedge Fund EUR returned -1.49% during the month.

Long-Short Equity

Headlines for the strategy were grabbed by the poor results of Long-Short fundamental managers with higher net exposures and a higher concentration on growth stocks in information technology, consumer discretionary and certain segments of the healthcare space. Performance generated by their short books was not enough to offset the strong derating of long investments. However, performance across the strategy was much more mixed. Overall, Long-Short strategies had decent downside protection, declining 1% to 2%. Low net strategies held up well, while value-focused funds had one of their best months ever. While some managers with a value style might hope their time to shine has finally come, we think that it is still too early to draw any definitive conclusions. However, we do think the equity market will tend to be more volatile and range-bound, offering stock-picking opportunities in a greater diversity of sectors and styles. Persistent inflation and rising rates will be less forgiving for poor business models feeding the short trades pipeline. At the same time, the undiscerned sell-off in the growing new economy has put innovation on sale, offering better entry points for businesses with products and services that are less sensible to rising inflation.

Global Macro

Average performances for the strategy’s index were down around -1.5%, as the weight of long equity positions was a big drag on performance. However, returns were dispersed depending on the region and asset class. It is hard to say if fundamental discretionary managers outperformed systematic strategies or vice-versa, as average returns tended to differ significantly between indices and Prime Broker reports. We can say that diversified strategies tended to offer good downside protection, while fundamental discretionary strategies had the biggest positive and negative outliers. Some managers surprised by the dovishness of central banks prior to the January statement in the face of a red hot US economy tended to be short fixed income and long the energy complex, which were significant performance contributors. As we have already said, we are currently seeing a progressive decoupling of monetary policies in some major economic regions. Asset risk premiums are moving across the board, and macro managers should be able to capitalise on these market moves. We continue to favour discretionary opportunistic managers who can draw on their analytical skills and experience to generate profits from selective opportunities worldwide. 

Quant strategies

Quantitative strategies are enjoying a positive momentum, and overall, performed well at the beginning of the year. Risk Premium strategies had one of their best months ever, benefiting from the rotation from growth to value. CTAs had another good month, with trading in commodities and fixed income contributing positively to performance. Multi-Model Quantitative strategies continue to use higher volatility regimes to their advantage, generating good returns. The latter are usually strategies that offer more consistent returns across different market environments, but the level of resources required to play in that arena are significant, making it a league for just a happy few. 

Fixed Income Arbitrage

As inflation materialised for longer and higher than priced in by central banks, the short part of the US yield curve is in for a steady ride. Unlike last year, fixed income players are positioned for either an outright short, or a flatter yield curve as the dynamic on the long is more complex. The momentum of economic data coupled with the ongoing change of central bank rhetoric offer plenty of opportunities in the fixed income market. In January, all our fixed income managers are positive and benefited from this supportive environment. 

Emerging markets

The anticipation of the rate hike cycle by the Fed did not generate the usual flight to safety flows, where investors would be selling EM assets sensitive to the cost of hard currency debt in favour of developed market assets. Conversely, cheaper assets of commodity-exporting countries benefiting from rising prices and a favourable outlook for cyclicals enabled by a weakening pandemic seemed to be a good arbitrage. Latin American equities did well and Chinese equities benefited from an expected easing of government intervention and signs of stimulus for the property market. Obviously, Eastern Europe and more specifically Russian assets, were strongly penalised by the risk of war.

Risk arbitrage – Event-driven

January was relatively muted for Event-Driven strategies. Although absolute returns were weak, the relative contribution to the market was valuable as they managed to capture a very small portion of the downside. Merger Arbitrage declined slightly, as merger arbitrage spreads widened. Special Situations struggled a little more, as their investments tend to be less hedged and exposed to softer catalysts. For 2022, the industry does not expect a repeat of last year’s record activity in deal making, but they expect to have plenty of deals in the pipeline to deploy capital on. Rising interest rates and equity volatility are risk factors to be taken into account more seriously going forward, but will also help maintain wider spreads and a less crowded strategy. There is an element of cyclicality that is structural to this industry, however, and the impact of COVID-19 and industries undergoing structural transformations will generate further corporate actions, giving managers opportunities to deploy capital. With investors currently looking for diversification, Merger Arbitrage provides an interesting tool that is structurally short-duration, where deal spreads are positively correlated to increases in interest rates.


The environment is relatively calm for Distressed strategies for the moment. The volatility seen in sovereign yields has not yet spilled over into corporate spreads, apart from specific situations. Managers are still monetising stressed investment opportunities occurring after the COVID-19 crisis in 2020. The opportunity set for the strategy remains modest or limited to specific sectors. Nonetheless, we remain attentive, because, as central banks initiate tapering and rates start to rise, this strategy might become more attractive. We favour experienced and diversified strategies, to avoid having to cope with extreme swings in volatility.

Long short credit & High yield

Credit spreads have widened, but remain close to historical lows. Investors now believe that the power of the “Fed put” will progressively start to fade away, improving the opportunity set for credit-picking from a Long-Short perspective. Chinese real estate-related credit opportunities are making their way into some of the hedge funds with research capabilities in Asia. Although the Evergrande debacle is still in everyone’s mind, the possibility that the Chinese government would allow a repeat of a Lehman scenario is thought to be less probable, considering the importance of real estate to the Chinese economy.


Find it fast

Get information faster with a single click

Get insights straight to your inbox