24 JUL

2018

Absolute Return , Asset Class

The art of the deal

The US trade war with China, as well as other geopolitical issues around the globe, have been the main drivers of the markets this month. The US Administration has put some barriers on China’s outbound investments, which led it to its lowest point in four year’s (38% down in one year). The Renminbi suffered during June, its largest monthly fall against the US dollar, indicating China might use currency devaluation as a retaliatory tool against the US. Furthermore, emerging markets currencies suffered this month. In fact, investors fear that higher US rates might have a negative impact on emerging economies because of the higher cost of debt for economies highly geared to US denominated issues.

During June, the S&P 500 increased by 0.48% and the Philadelphia Semiconductor index decreased by 4.73%, partly due  to the increasing tensions between the US and China. However, the tech heavy NASDAQ index, hit a record high and ended the month up 0.9%, as well as the NYSE Fang+, which increased by 5.01%. This index spread could be explained by the fact that large technology firms are less affected by trade tariffs.

On the currencies side, the USD continued its appreciation, especially when comparing it with currencies of G7 members.

In Italy, after the strong movements of May that saw government bond prices fall substantially, the situation stabilized, with yields easing between 10 to 30 bps along the curve. Nevertheless, the spread between the Italian and the German 10 year bonds remains close to this year high, reaching 238 bps at the end of the month, showing investors still favour safety above yield.

The HFRX Global Hedge Fund EUR is down 0.48% on the month of June.

Long short equity

June was a month with substantial volatility, in particular, big mid-month reversals in the S&P 500. Stocks are not moving according to their fundamentals, but rather extreme positioning towards quality (GARP type stocks) on the long side and extreme levels of short interest on value stocks on the other side. Managers that are able to navigate this environment, are those who have a balanced approach to factor stocks.  The disparity in returns among L/S managers was quiet large in June.


Global Macro 

June was a good month for Macro funds. Market volatility is offering good entry points on emerging market currencies and  rates on the long and the short side. Dispersion is finally appearing in both emerging and developed countries. Political statements, as well as trade wars, are  driving market moves. Italy is challenging German economic models, whereas Brazil seems to have won the battle versus inflation. Mexico may be a risk, depending on the true political ideology of its recent elected president. China slowdown is a given but still has room to operate. We think that Global macro strategies offer a wide range of investment opportunities.


Quant strategies

Market environment has been more supportive for trend-following stategies, especially those with a large allocation to commodities(oil has been a strong p&l contributor). In the meantime, equity strategies, either price driven or fundamental based, have suffered from the market whipsaws, ending the month in negative territory.


Fixed Income Arbitrage

We kept our fixed income arbitrage allocation at the same level. Interest rates volatility is back where it was before its May  spike. In this environment of very low volatility, it has been challenging to post positive returns.

Nevertheless, thanks to its positive convexity bias, we kept our allocation in the sector.

Since the beginning of the year, all the managers in this space delivered strong risk-adjusted return, while being positively exposed to volatility.

 

Emerging markets

The US government decision to use their market power to increase their advantages over the rest of the world could create significant disruptions in the short term. The impact is predicted to be overall negative. In fact, the “American First” Donald Trump’s policy, as well as a situation of tight liquidity, implies that some economies, and more precisely, the emerging ones, could get worse on a short term basis. Over the longer term, after passing through this difficult period, emerging markets in Asia are meant to have a large growth potential. Especially, EM countries that have invested massively in education or technology will  outperform over the long run. This dispersion between EM countries could represent potential long and short investment in the future.

Risk arbitrage – Event-driven

Event driven strategies, in general, and merger arbitrage, in particular, had a good month in June. The outcome of the Time Warner trial decision sent a positive signal to the market for large, complex  vertical mergers. NXP Semiconductors was a losing position for most funds, because it seems this deal approval by Chinese regulators, is dependent on the decision of the US Department of Commerce to authorise (or not) ZTE to distribute its components in the US. The opportunity remains intact with a large number of deals to be closed pricing in, an interesting spread.


Distressed

We are closely monitoring distressed managers, due to the potential of high expected returns, but broadly remain on the sidelines. Nevertheless, a growing number of US hedge funds specializing in distressed assets are starting to raise money in anticipation of the next economic downturn.

 

Long short credit & High yield

The tight spread level coupled the low volatility environment despite strong outflows in the asset class support our negative view on the strategy.