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Following a sharp correction in risk assets for the second
time this year, equity markets initiated a rebound by the end
of October.
Initially caused by fears the U.S. economy was
overheating, the market later focused on profit warnings
during the earnings season, especially when companies
reported cost pressures related to trade wars.
The selloff in October was difficult to navigate for hedge
funds, but there were substantial divergences across
strategies.
L/S Equity and Event-Driven strategies underperformed
due to their elevated market beta. L/S Equity strategies
also suffered due to the rotation in risk factors which saw
growth/ momentum stocks underperforming value and low beta stocks. Within Event-Driven, Special Situations
strategies were especially hurt but Merger Arbitrage was resilient.
On a positive note, L/S Credit, Merger Arbitrage and Market Neutral L/S strategies were highly resilient thanks
to their cautious positioning and low market beta. Global Macro strategies were also resilient, in several cases
thanks to short positioning on equities.
Going forward, we believe that market concerns are overdone and expect the market rebound to consolidate.
Over the medium term however, the growth deceleration in the U.S. coupled with monetary normalization suggest
the volatility regime might remain elevated. Hence, low beta strategies such as Merger Arbitrage and Fixed
Income Arbitrage remain highly attractive.
On top of that, we also favor flexible L/S Equity strategies that can
adjust their net exposure dynamically.
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