28 SEP


Absolute Return , Topics

Another day in paradise

During August, the markets went into risk-averse mode following military tensions with North Korea. Equity momentum also took a breather following a more cautious sentiment on European company earnings as Eurozone PMIs faded from elevated levels and faced headwinds from a strong Euro.

As a consequence, most developed-market equities were flat-to-slightly-down, apart from Hong Kong and mainland China stocks, which were up by low single digits. Latin American equities, supported by commodities, were also up. Sectors underperforming were mainly energy, finance, telecommunications and consumer discretionary, whereas technology, utilities, materials and healthcare added to performance. In fixed income, bonds rallied, with long-term maturity yields tightening 15 bps on average. The dollar lost value against most major currencies apart from the pound sterling. On commodities, with the flight to safety, precious metals did well. Oil and soft commodities were on a downward trend until the US and the Caribbean islands were hit by hurricanes.

HFRX Global Hedge Fund EUR index was slightly up.

Long short equity

Long/short equity managers did very well on average during the month. They managed to capitalize on fundamentals during the earnings season, with many of them generating positive absolute returns for their long and short books. Fundamental stock-pickers were able to benefit from weakened strong directional trends in developed markets. There is still a lot of uncertainty regarding the reforms that the Trump administration will implement. In Europe, there are concerns about the current strength of the Euro and its potential negative impact on the recovery of the European economy. Nonetheless, the recent normalization continues to unfold and we are progressively transitioning to more pro-cycle managers, who, we believe, are likely to be best positioned to take advantage of the possible pro-business policies expected from the new administration in the US and Europe.

Global Macro

Global macro managers did well in August, due to long positions in govies, cross-currency trades shorting the USD, short commodity positions on oil and agricultural goods, and long bets on precious metals. Discretionary managers were able to navigate 2017 more smoothly than systematic managers, who had a hard time making money on currency, commodities and fixed-income positions. We believe significant shifts in asset prices will continue to occur as anticipations adjust to reality. Macro strategies will be able to capture and benefit from these wide market moves, thanks to the increasing volatility on rates and FX. Our Global Macro bucket may balance our net long exposure as it invests in different risk factors to our equity funds.

Quant strategies

Since the beginning of the year, quant strategies have had difficulties posting positive returns. Long-term models were the ones less affected by recent short-term market sentiment reversals. Long-term trend-following as well as carry trades were hurt by FX reversals. Momentum and Quality performed positively in Europe and the US. Short volatility remains a positive strategy but, overall, higher volatility would increase the number of opportunities in our quantitative bucket .

Fixed Income Arbitrage

We kept our fixed income arbitrage allocation at the same level. Following the French elections, the spread between Germany and France reduced and European swap spreads returned to their December 2016 levels. Conversly, volatility on interest rates has risen slightly since then in the Euro zone.
The US Libor / OIS spread reverted to its historical lows and former price regime.

Emerging markets

Emerging markets still offer plenty of investment opportunities across asset classes (currency, interest-rate curve, single-name equity and debt). Our EM macro managers were successful in generating returns in Asia and Latin America. Both Brazil and Venezuela have experienced a significant increase in volatility in recent weeks.

Risk arbitrage - Event driven

We are more positive on the strategy even if we remain mindful of the risks linked to the net long bias of event managers. The number of transactions could increase if some degree of deregulation is put in place in the US and also in Europe and if business leaders’ confidence is not affected by political missteps. In such a case, large cash balances earmarked abroad by US corporations could be repatriated and possibly used for acquisitions.

Investments in European event managers that we are exploring will benefit from the need to bolt on growth. In M&A strategies, we favour less static and more spread-trading-oriented managers, as average spreads among deals have compressed significantly.


We are more bullish on the distressed cycle, because of the potential increase in interest rates and the reduction in QE. So far, the energy sector, in which there has been massive issuance in recent years, has provided an attractive pool of opportunities, given the volatility of oil prices and its impact on these securities. Traditional brick and mortar retailers, a sector seriously affected by technology innovations, offers plenty of dislocations.

Long short credit & High yield

The quest for yield and the zero-to-negative rate environment are still providing strong support for the asset class but volatility could spike if rapid changes in monetary policy surprise the market.