Activity paused leading up to the Jackson Hole Economic Symposium, where a potential pivot in Federal Reserve policy was revealed by Chairman Jerome Powell, hinting at a possible easing cycle. Global macro signals remained mixed. The US economy continued to show resilience, supported by consumption and services, even as manufacturing surveys softened – as showcased by the 73k uptick in payrolls, compared with an expected 115k. In Europe, growth momentum stayed weak, with Germany and France flirting with stagnation and Southern Europe holding up relatively better. China’s recovery remains weak, with targeted policy support offsetting persistent real-estate headwinds.
Credit conditions stayed supportive overall, though spreads remain vulnerable to any deterioration in macro data. Bond market volatility, as measured by the MOVE Index, remained relatively stable, reflecting a cautious market environment. Equities in the US outperformed, continuing to narrow the year-to-date gap with Europe, where major indices posted small negative single-digit returns. Sector-wise, defensives lagged, while technology and cyclicals such as energy and industrials drove gains.
The HFRX Global Hedge Fund EUR returned +0.89% over the month.
August was a stabilising month for Long-Short Equities, supported by resilient US equity markets and ongoing sector dispersion. The S&P 500, led by strong performance in Healthcare and Materials sectors, finished the month up low single digits. Directional strategies and managers with a growth and technology tilt outperformed. Investors are increasingly focusing on US growth resilience, sector leadership in technology and industrials, and persistent weakness in Europe. This divergence has been mirrored in hedge-fund allocations, with US-focused L/S managers seeing stronger alpha capture than their European peers. Dispersion between regions and sectors remains elevated, offering attractive opportunities for stock-pickers. In an environment of slowing global growth, diverging policy paths and heightened geopolitical uncertainty, Long-Short Equity strategies remain well positioned to extract alpha from persistent market dispersion.
Global Macro strategies posted gains in August, supported by tactical positioning around policy expectations and regional divergences. Managers profited from long US and Asian equities, long Western sovereign rates, and short US dollar trades as the Fed signalled caution at Jackson Hole. On average, Macro discretionary strategies are up low single-digits in August and up low double-digits since the start of the year. Dispersion remains wide, with discretionary managers capturing policy-driven volatility, while systematic diversified strategies have difficulties capturing market trends. According to Morgan Stanley strategists, economic decoupling between a resilient US, a stagnating Europe, and an uneven China recovery is creating fertile ground for relative value and thematic macro trades.
Quantitative strategies delivered positive but modest performances in August. Trend-following models’ exposures to equities and energy helped early in the month, but these gains were negatively balanced by trades in currencies and rates. Since the start of the year, Multi-Strategy Quantitative strategies remain among the stronger performers, reflecting robust alpha from diversified systematic approaches. We believe that elevated macro uncertainty and uneven regional growth continue to create fertile ground for models capturing dispersion, reinforcing quants’ role as resilient portfolio diversifiers.
July once again proved to be a challenging month for fixed income arbitrage strategies and performances were once more dispersed. 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 2-year Treasury yield. However, the long-term impact of tariffs remains uncertain. US swap spreads continued to trade within a narrow 5 bps range. In Europe, market activity was relatively muted as well, with rates trending flat or higher. Despite this complex environment – that 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.
Merger Arbitrage and Special Situations books and deal volumes’ comebacks drove risk arbitrage and event-driven performance. Global M&A activity has been below expectations coming into 2025, but volumes remain above last year, supported mostly by renewed US corporate activity. On average, performances were positive during the month, with contributions coming mainly from the merger arbitrage book. Overall confidence is gradually returning, with “paused” deals expected to re-emerge into year-end as policy visibility improves.
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 began to partially de-escalate. High Yield spreads of US corporations continued to tighten during May but are still wider compared to the start of the year, reflecting the heightened risks for the corporate world of deteriorating economic fundamentals. Prior to the hard tariff disclosures, managers were relatively constructive regarding the credit market. Future positioning and opportunity set will depend on the US Administration’s policy decisions and the next few quarters of hard data. According to J.P. Morgan, rising refinancing needs combined with expected slow supply, especially in Europe and in highly leveraged US sectors, could set the stage for more distressed opportunities into late 2025.
Long-Short Credit strategies were steady in August, as corporate spreads held tight and earnings broadly met expectations. Managers concentrated portfolios on high-conviction longs while maintaining hedges, generating alpha shorts in weaker credits. Since the start of the year, credit strategies have delivered positive mid-single-digit returns, attracting strong inflows into credit arbitrage strategies. 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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