Hedge funds outperformed but the devil is in the details

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The return of market volatility in February hurt equity markets significantly. For the first time in 15 months,
the MSCI World ended the month in the red, down -3.5%, as EMU and Japanese markets underperformed.
One area of concern is that fixed income did not provide protection. The Barclays Global Aggregate Bond
Index was also down in February. Actually the equity market rout appears to have been caused by fears of
inflationary pressures, pushing bond yields higher in anticipation of a tighter monetary stance in the U.S.

The positive correlation between equity and bond returns is an issue for investors looking for protection and
diversification.

In a context where investors are growing increasingly uncomfortable with the valuation of risk assets,
Alternative UCITs continued to experience sizeable inflows in early 2018. Over the past three months
(November-January), Alternative UCITs funds in Europe saw significant inflows (EUR 14.2bn), according to
Morningstar.

In terms of performance, the Hedge Fund industry was down in February but managed to outperform
traditional asset classes. Yet, the devil is in the details. Performance was dragged down by CTAs, which
suffered from trend reversals in equities and commodities. Some segments of the Even-Driven strategy,
namely Special Situation funds, also suffered as a result of their elevated beta to equity markets.
On a positive note, Fixed Income Arbitrage, Market Neutral L/S and Merger Arbitrage were highly resilient.

The positive sensitivity of Fixed Income Arbitrage to rising bond yields was again demonstrated, as well as
the low beta features of merger arbitrage. These are two strategies on which we maintain an Overweight
stance going forward.
With regards to Market Neutral L/S, on which we have been Underweight, the
strategy benefitted from the absence of rotation in risk factors. Finally, L/S Equity funds were also resilient,
and variable biased funds appear well fit to market conditions. In effect, the market environment might
remain unstable going forward, especially as the U.S. administration turns aggressive on trade barriers.