25 JUL


Absolute Return , Topics


This is the story of an American, an Italian and an English central banker who meet in Sintra. What do they talk about? They managed to surprise the markets by maintaining a rate's normalization rhetoric despite inflation figures below target.

European equities forfeited around 2.75% for the month on the news. While the S&P 500 and MSCI Latam performance was range-bound, Asian equities were firmly positive. The Nasdaq lost 2.45% in June following an impressive run during the first 5 months. The other outperforming sectors were biotech stocks, financials and energy. US rates moved the most, with short-term rates adding 0.25% on average and issues over 2y tightening 0.1% to 0.15%. On credit, the most notable fact was European financials rallying 0.2% following southern European bank resolutions. Brent was volatile losing up to 12% to rally towards month-end to finish down just below 5%.

HFRX Global Hedge Fund was flat in June.

Long short equity

Growth stocks and tech in particular did well during Q2 2017 until mid-June, when value outperformed. Equity long short alpha was slightly negative for the first time this year as shorts increased more than longs in part due to covering of high short interest names. US hedge funds have been decreasing their net exposure to equities while some of these flows have found their way to European equities due to strengthening fundamentals and increasing political stability for the Euro bloc. 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

Q2 was a difficult quarter for global macro managers mainly due its long dollar and short bonds positions. Discretionary managers were able to navigate this period more smoothly as opposed to systematic managers, who had a hard time making money on their currency, commodities and fixed income positions. 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. Conversely, 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 regimen.

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, 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 arbitrage, 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 are being seriously affected by technology innovations and offer plenty of dislocations within the sector.

Long short credit & High yield

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