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Fed fund futures markets now give a 58% probability for a rate hike at the mid-December FOMC meeting. The market is now prepared for the next interest rate move, provided that US data releases do not deteriorate.
Hedge funds recovered from recent losses, up 0.4% overall last week. CTAs were up
2.4%, however they remain in negative territory month-to-date. Additionally, L/S Equity
managers outperformed as they were up 0.8% last week. European L/S equity funds
outperformed as defensive styles such as momentum, quality and low beta outperformed
aggressive styles such as value and size in Europe. After several years of
underperformance of value stocks, many L/S managers have favored defensive biases and
do well when quality and momentum stocks perform well.
The recent rise in risk aversion, which was a short term movement, did not lead to a
significant deleveraging by hedge funds. We estimate, on the back of a bottom-up
calculation, that the equity beta has fallen by five percentage points, to 25% as of midSeptember.
This is a moderate move that has occurred on multiple occasions this year. At
the hedge fund strategies level, L/S Equity managers were the most aggressive in cutting
their equity beta, followed by CTAs. Overall, the beta remains at high levels at present
compared to the year to date average (18%).
Going forward, we maintain our preference for hedge fund strategies which provide
protection considering the rich valuation of traditional markets. Upside risks appear rather
limited, though the US earnings season, which will start in two weeks, can bring positive
surprises.
As a result we maintain the overweight stance on merger arbitrage, fixed income
arbitrage and market neutral L/S. We also maintain long term CTAs at neutral as their long
equity/long fixed income stance implies that CTAs are less protective than they used to be.
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