This has led to growing divergence between Treasuries and Bunds across the yield curve and further depreciation of the EUR vs. the USD.
This environment has been supportive for hedge funds. Most strategies delivered positive
returns last week as risk assets moved higher on Trump’s market rally. Event Driven
outperformed as spreads tightened for deals such as Time Warner/AT&T, Monsanto/Bayer,
LinkedIn/Microsoft and Alere/Abbott. Such deals rank well in Merger Arbitrage portfolios.
On the Special Situations segment, positive developments in Marathon Petroleum and
Conagra Brands contributed to returns.
Global Macro and L/S Equity strategies also delivered solid returns last week. The former is
well positioned to benefit from the divergence between Europe and the U.S. discussed
above. With regards to L/S Equity, Long Biased managers outperformed other sub
strategies. The best performer was a value L/S manager (up 3% last week, 13% YTD). At
the other end of the spectrum, CTAs were flat and continued to underperform.
As part of the new market regime that has started to take shape after the election of Donald
Trump, we have proceeded with some changes in our investment recommendations. We
have downgraded Short Term CTAs to make room for an upgrade in L/S Equity Long Bias.
We now keep both Short and Long Term CTAs at neutral. Meanwhile, we find Market
Neutral L/S Equity to be less appealing while the opportunity set for Special Situations has
improved. The likelihood that U.S. corporates will repatriate their cash held overseas under
the new administration may translate into shareholder friendly policies (dividend distribution
or share buybacks) or more mergers and acquisitions. This creates opportunities for
Special Situations managers which we have upgraded at slight overweight.
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