14 MAI

2019

Absolute-Performance , Themen

In guidance we trust


Despite a cautious approach and scepticism over current market valuations from many active investors, the indices continued to push, up in the case of most of the equity markets. Exporters did well, with Sweden’s OMX and Germany’s DAX returning a bit more than 7% over the month. The remaining main markets were up between +2% and +4%. Argentinian equities were the negative outlier. For investors, the political comeback of Mrs Kirchner reawakened bad memories, leading the Merval Index to decline by -11.64%. The US political debate around the effectiveness and elevated cost of the American healthcare system was negative news for the sector. Healthcare was the only S&P 500 sector in the red, returning -2.74% for April. Bearish investors continue to be flummoxed by the market’s performance, since US equities saw negative earnings growth YoY in Q1 2019 for the first time since 2015. Nevertheless, the actual figure was better than the expected YoY -3.9% earnings decline. Corporate guidance, which is being closely scrutinised, has become one of the main items of information moving equity prices.

Fixed income markets for Developed Market sovereign issues were rather calm relative to Q1. At the end of March 2019, the yield-spread between the 1-month and the 4-year gilts maturities was a negative -12 bps. This spread had turned positive (+15 bps) by the end of April, reflecting investors’ growing confidence that a better solution would be found to avoid a messy hard Brexit. Also, Argentinian 3-year yields widened by +500 bps for the same reasons mentioned previously.

The trend was, overall, negative for soft commodities and industrial metals during the month. Wheat declined by -8.57%, aluminium lost -6.01% and coal futures returned -5.88%. Oil prices continued trending higher, with the Brent gaining +6.45% during April and +35.32% for the year.

The HFRX Global Hedge Fund EUR was up +0.08% during the month.

Long short equity

Overall, April was a good month for Long Short Equity strategies. Economic data surprised markets positively, favouring managers with a risk-on bias. Funds with a net long bias outperformed market-neutral and conservative strategies during the month and YTD. In terms of sector specialists, despite a rich pipeline of investment opportunities, LS Equity healthcare managers had difficulties performing during April. Part of the US political establishment re-expressed its willingness to reform the healthcare sector, viewed by many as inefficient and expensive.

We continue to like Long Short Equity strategies because the dispersion, between and within sectors, is creating large alpha opportunities for the strategy. Also, this strategy offers a wide range of levers that, from a long or short perspective, can be used to benefit from industry restructurings and sector dispersion.

Global Macro

Equity markets were boosted by the dovish tone of the Fed before dipping towards the end of the month. The ECB shifted its forward guidance policy, announcing another LTRO programme designed to make banks inject credit into the economy. The US posted its biggest ever monthly budget deficit, mainly due to the Trump tax cut. Recent movements in risky assets were comforted by positive economic indicators from China and the US. Discretionary Emerging Macro strategies lagged, due to long exposures in Argentina. Global macro strategies are benefiting from contradictory market forces. 

Quant strategies

On average, quantitative strategies performed very well during the month. Directional models – benefiting from trends in most asset classes apart from bonds, which fell out of flavour with the increasing risk appetite – generated positive performance. As for last month, Equity Statistical Arbitrage strategies were also, on average, positive contributors, although gains have been more mitigated due to wider dispersion in country and sector contributions.  

Fixed Income Arbitrage

Managers’ returns were positive in April. The strategy has benefited from a much better opportunity-set in the US , as well as from opportunities in Europe (e.g., France). It is important to highlight that funding and access to repos is one of the pillars of the strategy and that access to bank balance sheets has become more challenging. Since the beginning of the year, all managers in this space have delivered strong risk-adjusted returns, while being positively exposed to volatility. 

Emerging markets

If dovish statements from central banks seem to confirm the positive sentiment taking root in Emerging Markets, performance, due to local developments, was a mixed bag during April. Additional Chinese financial stimulus seems to be compensating for the uncertainty around tariffs, leading managers to increase their investment exposures. However, Latin America equity markets and, more specifically, Argentina, are lagging the rest of the EM. Long bond positions in Argentina contributed negatively, due to a significant widening of spreads.  

Risk arbitrage - Event-driven

Risk Arbitrage strategies – benefiting from positive contributions from the Event-driven and Merger Arbitrage strategies – performed well during the month. The Anadarko deal generated strong profits to managers after Occidental Petroleum counterbid Chevron’s offer; the new offer represented a premium of about 20 percent to the previously announced deal.
With almost 2,300 deals totalling more than $400bn, M&A levels were again on the increase, climbing towards the 12-month historical M&A monthly volume of approximately US$410bn. Although deal activity had somehow paused marginally in February, we are encouraged by the healthy level observed in March, with both a number of large-scale $10bn deals being announced in the US (including Worldpay / FIS and WellCare / Centene deals) and again in Europe (Inmarsat plc / Private Equity and RPC Group / Berry).
Managers are, on average, optimistic about the outlook for Risk Arbitrage, due to a supportive business environment with benign financing conditions and the willingness of corporate management teams to fight for sources of business growth.

Distressed

We still believe that we are in the late stages of the credit cycle. The Q1 2019 risk-on environment reversed most of the spread-widenings seen in Q4 2018. Distressed and stressed strategies are currently tending to overweight their portfolios with hard-catalyst investment opportunities that are diminishing the negative impact of beta. Managers are raising cash levels for dry powder with which to reload the portfolio with the new issues hitting the distressed market. We are closely monitoring distressed managers, due to the potential of high expected returns, but remain broadly on the sidelines. 

Long short credit & High Yield

Despite some more volatility, spreads – supported by the chase for yield – are still heading in the same direction. Hence we remain underweight, as there is limited comfort in being short the credit market, where there is strong demand and the negative cost of carry is quite expensive.