14 JUN

2017

Absolute Return , Topics

"En marche"...But where?

Late in 2016, the European Union's future seemed compromised by the Brexit vote and the major national elections in the offing that could mark the beginning of the end of this political and economic partnership. Today, in spite of the many as yet unresolved issues, front page news is all about Trump - Russia; Temer - Brasil and Qatar - Middle East. Improving economic fundamentals in Europe and better political perspectives for the main players are bringing investors back to European assets.

Equity indices did well overall, apart from specific regions like Brazil, which has been hit by political scandals. The technology sector has been a huge driver of returns, masking the difficulties experienced by some players (energy, department stores, …). The effect can be seen on the spread between the Nasdaq 100 (+6.11%) and the Russell 2000 (-2.16%), the latter being lighter on tech and more exposed to energy. Positive European momentum helped the currency gain 3.22% versus the dollar. Fixed income spreads haven't move significantly.

During May, the HFRX Global Hedge Fund was basically flat, returning +0.06%.


Long short equity

Since the end of Q1 2017, sectors benefiting from Trump’s policies have taken a back seat due to all the uncertainties surrounding its administration. Tech stocks have taken over, leading indices to new highs. Stretched equity valuations in the US and economic data failing to confirm booming sentiment indices led investors to raise allocations to the improving European story. To accommodate to market evolution with the increase in passive investment and the difficulty in shorting, we have maintained our neutral stance on the strategy. The recent renormalization 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

Over the past quarter, stock markets in advanced countries – spurred on by expectations of fiscal stimulus and deregulation in the US and by solid incoming data – strengthened further. This optimism slightly faded towards the end of the quarter and continued into Q2 as the Trump administration had difficulties passing legislation on its new healthcare reform. Making America Great Again will take longer than initially thought. The outcome of the Dutch and French elections maintained market stability but the economic uncertainties remained. We believe significant shifts in asset prices will continue to occur as anticipations adjust to realities. Macro strategies will be able to capture and benefit from these wide market moves thanks to 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

During Q2 2017, Quant strategies 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. Volatility on interest rates has dropped significantly in Germany and in the US.

The US Libor / OIS spread reverted to its historical lows and former price regime. 

Emerging markets

If emerging markets still offer plenty of investment opportunities across asset classes (currency, interest-rate curve, single-name equity and debt), the market has come closer to fair value after an 18-month rally. To exploit these opportunities, we have invested in global macro managers, some specialized in a given region, e.g., Asia, and in local managers that carry out fundamental analysis and make on-site company visits to pick stocks. If both Brazil and Venezuela have experienced a significant increase in volatility in recent weeks, our managers have shown their abilty to navigate the sell-off.

Risk arbitrage - Event driven

We are turning 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 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 arbitrage, we favour less static and more spread-trading-oriented managers, as average spreads among deals have compressed significantly. 

In M&A arbitrage, we favour less static and more spread-trading-oriented managers, as average spreads among deals have compressed significantly. 

Distressed

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. Emerging markets may also offer opportunities due to the strength of the dollar and the hike in interest rates.    

Long short credit & High yield

We remain cautious on the strategy, as this asset class is driven more than credit spreads by the direction of the interest rate. The quest for yield and the zero-to-negative rate environment will still provide strong support for the asset class, and delivering performance on the short side is highly challenging.