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>> Monetary meetings, minutes, and speeches continued to
dominate market trends. The ECB and the Fed were more
dovish than expected, boosting risky assets. A majority of
hedge funds strategies delivered positive returns led by Fixed
Income Arbitrage and the L/S Equity Long bias funds. The
main drag in March came, for once, from the CTAs which lost
on the oil rally and to some extent on bonds.
>> L/S Equity: Value stocks boost the longest bias. The
longest bias funds outperformed thanks to their tilt on value
stocks. By contrast, the Variable bias group underperformed.
Their returned were dispersed. Variable Japanese and
European funds made do with a timid local rally compared to
that unfolding in the US and in EM markets. Neutral funds
benefitted from a pause in factor rotations.
The sentiment among the US managers that we surveyed is
improving.
While still waiting for fundamental evidence to
support the recent rally, they covered their short on energy
stocks, they turned constructive on the consumer and the
housing related sectors, and they reinforced their net
exposure. Sentiment is much more mixed in Europe. Number
of uncertainties keeps them cautious and reluctant to take
bold stances.
>> Event Driven returns were rather driven by
idiosyncratic developments. Merger arbitrage benefitted
from various developments. These include Staples making
progress toward the acquisition of Office Depot, the Pepco
acquisition finally receiving Washington’s green light,
Starwood obtaining a sweetened offer from Marriott. As a
result, deal spreads tightened in March. The basket of US
M&A deals that we track saw a 1% contraction of the average
deal spread.
Improving risk aversion helped activist positions and Special
Situation funds. Gains were partially offset by continued
pressure in the healthcare sector, though they managed to
dodge most of the Valeant plunge.
>> Tailwinds boosting L/S Credit and FI Arbitrage funds.
Credit spreads kept on tightening. The rebound in oil prices,
accommodative central banks, and fading stress regarding
China further eased the stress on high-yield. FI Arbitrage
funds successfully captured the convergence among credit segments. They also added P&L thanks to their Asian
exposures. Gains in Europe were capped by the cost of the
hedges they put in place.
>> The bearish CTAs’ positioning proved costly in March.
CTAs started March with their energy exposure cut by half
and a long position rebuilt in metals. Yet, the violent
rebound in oil prices was a severe drag. The drop in bonds
until mid-March, engineered by a dovish Fed, was the other
main source of losses. The FX bucket produced mixed
returns. Long JPY and crosses in the commodity block paid
off. These gains were offset by losses from short Euro and
GBP positions. Their long Equities produced positive returns.
While CTAs remain bearishly positioned they have
substantially modified their allocations. They reduced their
long US bonds and turned short on the dollar. They still hold
a small energy short, but built up longs in both base and
precious metals.
Better alpha conditions for US & European equities?
>> Global Macro: dispersed returns, mixed and balanced
exposures. They finished the month modestly up. Their long
USD positions was a drag. By contrast, their longs in EM
currencies were profitable. They have actively traded the
March monetary catalysts, in particular through their bond
exposures. They cut most of their long US bonds and
maintained their modest short in European bonds.
>> “Equity dispersion remains robust, correlations
plunged. The EPS season, unlikely to bring major surprises,
could mean more fundamental pricing. This is favorable for
L/S Equity funds.” says Jean-Baptiste Berthon, senior cross
asset strategist at Lyxor AM.
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