As Lionel Richie put it in his 1980’s hit, “What is happening here? Something’s going on that’s not quite clear.” Uncertainty has eased but remains extremely high. The economic situation remains blurry, with a significant gap between soft and hard data. However, markets have rebounded nicely and have seemingly temporarily brushed worries aside, with investors continuing to dance on the ceiling of valuations.
Equity markets performed well during the month, with the exception of the major European equity indices, which returned small single-digit negative returns over the period. US equities outperformed during the month, helping to narrow the gap that European equities had accumulated since the start of the year. At sector level, defensive businesses lagged technology and cyclicals such as Energy and Industrials.
US sovereign yields declined over the period, decreasing between 10 and 20 bps across the yield curve. Debt levels and the new US administration’s financing bill remain a priority concern for investors all around the world. However, the temporary de-escalation of trade tensions and expectations of a rate cut in the US pushed yields lower.
The HFRX Global Hedge Fund EUR returned +0.86% over the month.
June was a strong month for Long-Short Equities, with most strategies posting good returns. Directional strategies and managers with a fundamental growth focus outperformed market-neutral and value-tilted strategies. Returns were driven by strong alpha generation on long positions. In general, managers have fully recovered the losses accumulated on long positions following Liberation Day. Since the start of the year, Long-Short Equity funds have generated solid performances, with alpha generation evenly split between long and short books. Relative value performance has been particularly robust among managers with a geographical focus on the US and Europe, exhibiting up-capture return ratios ranging from 75% to 100%. Well-diversified capital allocations to Long-Short Equity strategies have proven to be resilient during market drawdowns and were able to generate strong risk-adjusted returns over time. In a world of sustained uncertainty and diverging economic performance, Long-Short Equities are able to extract alpha from increasing market dispersion.
Global Macro strategies had a strong month of June, as managers were able to monetise short-term asset price dislocations. Although long-term visibility remains challenging due to the impact of the US administration, tactical short-term positioning was very profitable. Strategies drove positive returns from long equity positions in the US and Asia, short the US dollar and long Western markets sovereign rates. Returns generated by global macro managers over the month are generally moderately dispersed and heavily skewed to positive returns. The ability to navigate markets has been challenged by the hyperactivity of the new Trump Administration, which has driven heightened volatility across asset classes. At the same time, this volatility has been a significant source of opportunity. The economic decoupling of major regional powerhouses has accelerated since the beginning of the year, offering attractive opportunities for macro managers to deploy capital and generate strong returns. However, caution is warranted over short-time horizons due to the unpredictability of the US administration's policy agenda.
Since the start of the year, the good performance of Multi-Strategy Quantitative managers has been offset by the performance struggles of Trend Followers. The environment has been challenging for CTAs due to the lack of lasting trends in many asset classes. During the month of June, on average, Trend Following strategies performed well, monetising long positions in equity indices, long positions in energy futures and short currency positions in the US dollar. Although CTA performance can sometimes be frustrating over specific periods of time, they are good investment diversifiers over the long term.
June once again proved to be a challenging month for fixed income arbitrage strategies. Yields in developed bond markets, including Japan, declined in response to lower inflation figures and weaker growth expectations. These data points contributed to a steeper US yield curve, driven primarily by a decline in short-term rates, particularly the two-year Treasury yield. However, the long-term impact of tariffs remains uncertain. US swap spreads continued to trade within a narrow 5-basis point range. In Europe too, market activity was relatively muted, aside from some uncertainty surrounding Dutch pension reforms.
Despite this complex environment—which requires disciplined risk management across all strategies—the fixed income space still presents a broad set of trading opportunities, including cross-country trades, relative value strategies and directional positions.
June was another strong month for the performance of Event-Driven strategies, with positive contributions from Merger Arbitrage and Special Situations books. Among the deals that contributed positively to performance was the acquisition of Juniper Networks by HP Enterprise, after the parties reached a settlement with the Department of Justice that cleared the way to close the deal. The acquisition of Interpublic Group by Omnicom Group was also approved by the FTC, with conditions via a proposed consent order. This will create one of the biggest media buying agencies in the world. Through the agreement, Omnicom agrees not to engage in collusion or coordination to direct advertising away from media publishers based on their political or ideological viewpoints. Although announced deal volumes since the start of the year were not in line with market expectations, the first semester saw deals worth around USD 2.15 trillion, up 26% from the same period last year. This was possible due to a 17% increase in activity in the US, but also due to a strong contribution from deals in Asia, where activity more than doubled. As markets are calming down, return expectations for the strategy are improving for the second half of the year. Much of the corporate activity that had been on hold may now be reactivated, potentially paving the way for a significant uptick in deal-making during the second half of the year.
Since the start of the year, credit markets were relatively immune to equity market volatility until corporate credit spreads spiked significantly in early April. Spreads then progressively eased through the month as tariff tensions started to partially de-escalate. High Yield spreads of US corporations continued to tighten during May, but are still wider compared to the beginning of the year, reflecting the accrued risks for the corporate world of deteriorating economic fundamentals. Prior to the hard tariff announcements, managers were relatively constructive regarding the credit market. Future positioning and the opportunity set will depend on the US administration’s policy decisions and the next quarters of hard data. One of the market’s current weak spots seems to be the leverage loan market. Over the last 12 months, the number of US High Yield Bond issuers being upgraded is 20% higher than those being downgraded. For US loan issuers, upgrades are 40% lower than downgrades. Also, according to the JP Morgan Default Monitor, over the last 12 months, the percentage of loan defaults including liability management exercises has reached 3.9%, which is treble the level of high yield defaults over the same period.
Although uncertainty levels remain high, corporate credit spreads have tightened significantly since 9 April, in part due to first-quarter earnings, which were in line with expectations and to the postponement of tariffs to July. However, it is widely believed that volatility will remain high during the year. Managers have concentrated their portfolio in their highest fundamental convictions, increased the level of hedges and lowered strategy directionality. On the other side, such a rich market generates numerous opportunities for alpha shorts. Absolute return or hedged investment approaches have gained more relevance with the increase of idiosyncratic risks and geopolitical uncertainty. Risk diversification is important and should be an integral part of the investment allocation process.
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