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.<\/p>\n
Hedge funds recovered from recent losses, up 0.4% overall last week. CTAs were up
\n2.4%, however they remain in negative territory month-to-date. Additionally, L\/S Equity
\nmanagers outperformed as they were up 0.8% last week. European L\/S equity funds
\noutperformed as defensive styles such as momentum, quality and low beta outperformed
\naggressive styles such as value and size in Europe. After several years of
\nunderperformance of value stocks, many L\/S managers have favored defensive biases and
\ndo well when quality and momentum stocks perform well.<\/p>\n
The recent rise in risk aversion, which was a short term movement, did not lead to a
\nsignificant deleveraging by hedge funds. We estimate, on the back of a bottom-up
\ncalculation, that the equity beta has fallen by five percentage points, to 25% as of midSeptember.
\nThis is a moderate move that has occurred on multiple occasions this year. At
\nthe hedge fund strategies level, L\/S Equity managers were the most aggressive in cutting
\ntheir equity beta, followed by CTAs. Overall, the beta remains at high levels at present
\ncompared to the year to date average (18%).<\/p>\n
Going forward, we maintain our preference for hedge fund strategies which provide
\nprotection considering the rich valuation of traditional markets. Upside risks appear rather
\nlimited, though the US earnings season, which will start in two weeks, can bring positive
\nsurprises. <\/p>\n
As a result we maintain the overweight stance on merger arbitrage, fixed income
\narbitrage and market neutral L\/S. We also maintain long term CTAs at neutral as their long
\nequity\/long fixed income stance implies that CTAs are less protective than they used to be.<\/quote><\/p>\n
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