Trading FED vs. ECB benefits macro strategies

• The Fed and the ECB took center stage The Fed and the ECB took center stage The Fed and the ECB took center stage – again – in
  November. The October 28 FOMC statement downplayed abroad
  risks and specified that members would consider “at the next
  meeting” whether action would be appropriate. It spurred an orderly
  but clear market repositioning. Later on, several ECB comments
  built up expectations for additional monetary easing at their
  December meeting. Tactical positioning around these two catalysts
  dominated markets. It mainly benef It mainly benefitted to CTAs, itted to CTAs, itted to CTAs, Global Macro Global Macro Global Macro
  and Variable L/S Equity funds. and Variable L/S Equity funds. Most other strategies Most other strategies Most other strategies recorded recorded
  mixed returns.

• L/S Equity kept their cautious exposure, with li L/S Equity kept their cautious exposure, with limited portfolio ed portfolio
  changes. The strategy made slow and steady gains over the
  month. Equities were not the markets’ epicenter. Trading volumes
  remained subdued ahead of the Fed and ECB meeting. Managers’
  positioning remained cautious – even among the long US bias
  funds – and portfolios were little changed. Amid a lack of
  directionality, the alpha was mainly produced on short books.
  Asian and UK focused managers were the most successful at this.
  European managers underperformed, not helped by a
  disappointing earnings season. Market neutral funds continued to
  suffer from momentum and sector rotations. After weeks of poor
  alpha conditions – with high correlation and poor dispersion – the
  backdrop is now recovering in most G3 markets.

• Merger Arbitrage outperformed their Special Situation peers. A
  greater opportunity set in the M&A space and few closing
  operations helped offset losses on Perrigo – a deal which
  accounted for an average 6% of the Merger fund net exposure.
  Indeed, the Mylan hostile deal on the Irish drug maker Perrigo
  failed. Mylan couldn’t gather the required shareholder majority with
  a view to participate in the wave of consolidation in the generic
  drug industry. In contrast with recent months, deal spreads were
  generally wider, driven both by more aggressive M&A operations,
  and higher risks. Risks include antitrust decisions due in 2016 for
  several mega deals and the threat from tax inversion regulation.
  This space is offering greater room for alpha generation.

The returns of Special Situation funds were rather macro than
company-specific driven. In particular, the healthcare sector, a key
culprit for the recent underperformance, staged a mild rebound,
with limited stock discrimination. Meanwhile the recovery in the
pricing of corporate operations continued, though at a slower pace
than headline markets. The cost of the portfolio hedges, implemented since October, was a substantial explanatory factor
for this month’s negative returns.

• L/S Credit continued to underperform Fixed Income continued to underperform Fixed Income continued to underperform Fixed Income Arbitrage Arbitrage funds. US credit markets were under increased pressure in November. The underperformance of HY relative to IG, loans or
  equities expressed concerns about the coming Fed normalization
  and a new slide in oil prices. With default rate and liquidity stress
  on the rise, credit concerns stepped up. In that context, L/S credit
  funds limited the damage, thanks to a cautious positioning,
  especially in the sectors which suffered the most – Energy and
  Telecom. Those focusing on European markets outperformed, in a
  market supported by improving macro data and by the ECB
  initiatives to boost credit in Eurozone. Fixed Income arbitrage funds
  continued to exploit dislocations in the relative pricing of cross
  credit markets. The alpha potential in this space has become
  attractive.

• CTAs more than more than more than recouped their post-FOMClossesin bonds in bonds in bonds. CTAs started in the red, hurt by the rate reversal triggered by the
  end-of-October FOMC. They fully recovered these initial losses
  over the month. As the odds for a December Fed start and ECB’s
  additional stimulus built up, long USD crosses and Euro bonds
  generated strong P&L. While CTA models cut most of their US
  long bond positions, they continued to strengthen their equity
  holdings. By month-end they remained long USD and equities,
  short European bonds and very short commodities – including in
  agricultural.

• Global Macro funds made the Global Macro funds made the Global Macro funds made themonth on their long held bullish month on their long held bullish
  dollar trade (especially against GBP, Euro, JPY). The bulk of their
  November return was generated thanks to their USD crosses in the
  aftermath of the FOMC. In contrast, their long equities were not a
  substantial contributor. They started November with a moderate
  rate exposure, with increasingly active tactical positioning around
  monetary announcements. By mid-month, they reweighted more
  firmly their long US bonds and their short Euro bonds – implicitly
  giving credit to a bold ECB action. By month-end there were net
  neutral on US equity and long both European and Japanese
  stocks. They were also short base metals but neutral energy, with
  a long US vs. short European bond exposures. They continued to
  reinforce their long USD play.

“The cycle remains tame, but it is aging and asynchronous.
Markets remain subject to these conflicting forces. Those forces
supporting volatility and dispersion will prevail in our view, making hedge funds attractive.” says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.