16 APR


Absolute Return , Topics

The unloved bull market

March seemed to have more difficulties to find a direction, after a strong recovery  from 4Q 2018 drawdowns in the first two months of 2019. It would be a serious stretch to say that sentiment has swung back dramatically towards the bull camp. However, growing concerns about the global macroeconomic picture have largely abated and investors appear to be more focused on lower interest rates.

Over the month, some political and economic decisions impacted the financial markets, intensifying investors’ concerns. With a flurry of ongoing strains, the US Federal Reserve maintained its dovish policy, underlying economic slowdown and low inflation. The European Central Bank (ECB), too, kept its policy unchanged, expressing a negative view on growth and falling inflation.

Geopolitical challenges remain on overhang in Europe and the US. The uncertainty around the UK’s intentions to exit the EU is still present, with Parliament several times rejecting Theresa May’s negotiated agreement. Although the US-China trade talks have yielded some progress, no deadline for a deal completion has been set.

Equity performances were muted during the month for most markets. Chinese equities continued to rally, with the Shenzen CSI 300 Index returning 5.53%. US and European equity indices returned low single digits during the period. Japan and Korea indices lagged, with the Topix Index declining -1% and the Kospi down -2.49%. Turkey equities (-10.28%) were the biggest loser due to the heavy currency intervention just before the election.

Fixed income markets rallied during March, with US Treasuries posting a +1.91% return and Investment Grade +2.50%. Riskier issues underperformed, with the Bloomberg Barclays US Corporate High Yield returning +0.94% for the month.

Commodity performance was dispersed. Precious Metals fell during the month, led by Palladium (-12.42%), Silver (-2.75%) and Gold (-1.76%). WTI oil continued the upward trend it had initiated at the end of year, gaining +5.10% to finish the quarter with a +32.44% gain.

The HFRX Global Hedge Fund EUR was down -0.38% during the month.

Long short equity

It was a month of modest gains for equity indices. The Federal Reserve continued to support stocks in March. Performance within the Long Short strategy was a mixed bag. Funds with a net long bias outperformed market-neutral strategies. Managers with a more conservative or bearish stance continued to significantly lag during the month.

Semiconductor stocks reached new highs, following positive upgrades from sell-side analysts. Healthcare – driven by weakness in healthcare services and in the large-cap biotech companies – is lagging the broad market in 2019. This dispersion between and within sectors is creating significant alpha opportunities for the Long Short strategy.

Global Macro

Equity markets were boosted by the dovish tone of the Fed before dipping towards the end of the month. The ECB shift in its forward guidance policy and the announcement of an LTRO pushed the Bank to inject credit into the economy. The US posted its biggest monthly budget deficit, due mainly to the Trump tax cut. Average monthly job creations are still positive, despite disappointing figures for February. Risky assets remain in positive trends, despite many leading indicators disappointing during the month.  Global macro strategies are benefiting from contradictory market forces.

Quant strategies

On average, quantitative strategies performed very well during the month. Directional models generated a strong positive performance from most asset classes, with astounding gains from bond trends. Equity statistical arbitrage strategies were also, on average, positive contributors, although gains have been more mitigated since, due to the wider dispersion in country and sector contributions.

Fixed Income Arbitrage

Managers’ returns were positive in March. The strategy has benefited from the Fed’s new soft stance as well as reduced tension on the funding side, which offers an interesting opportunity, especially on the Libor/OIS basis, which is back to its lowest level since last September. In Europe, the new LTRO programme should have some impact on European swap spreads. 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 the dovish statement from central banks seems to confirm the positive sentiment taking root in Emerging Markets, investors  were hit by the sudden risk-off environment during the last week of March, on the back of softer economic data in China and the spectacular currency intervention in Turkey triggered by the election period. The cost of borrowing Lira soared to 1000% and  the 2-year yield jumped above 20%. Only time will tell when foreign investors will come back after such a fierce scenario.
Most managers posted a negative return for the month.

Risk arbitrage - Event-driven

Performance in the Risk Arbitrage strategy was positive during the month.
The largest contributor to the strategy was the Celgene/Bristol-Myers Squibb transaction, on the back of the positive heads-up by proxy advisors ISS and Glass Lewis, who recommended bidder Bristol-Myers’ shareholders to vote in favour of the transaction at the upcoming EGM on 12 April. Following activist involvement by Starboard Value and vocal opposition to the deal by Wellington Management, Bristol-Myers’ largest shareholder, the merger-spread of this high-profile $75bn pharma transaction had widened significantly last month from 11% to 22%. Nevertheless, following an acceleration of negative headlines (and the merger-spread continuing to be volatile during the month), the spread finally collapsed on the last day of the month, following strong statements by the proxy advisors.

With almost 2,300 deals totalling more than US$400bn, M&A levels increased again and climbed 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 US$10bn deals being announced in the US (including the Worldpay / FIS and WellCare / Centene deals) and again in Europe (Inmarsat plc / Private Equity and RPC Group / Berry).


The strategy took a breather during March, after a strong start to the year.
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.