Intensifying stress over North Korea boosted most safe havens while dragging risk assets. VIX rocketed up, DM govies yields retraced, credit spreads widened, and gold progressed. This move quickly reversed upon signs of de-escalation. Meanwhile the growing political isolation of President Trump further dented in the - modest - remaining hopes of reflationary policies in the U.S. Amid reduced summer trading volumes and a lack of compelling market catalysts, investors de-risked their portfolios.
The Lyxor Hedge Fund Index was down this week. Global Macro funds underperformed, though returns were dispersed. Though exposures to rates and equities usually cost, they recorded gains in FX. CTAs fared better with gains in short commodities, offsetting their losing long equity allocation.
Event-Driven funds were resilient. Special Situations funds benefitted from their tilt to non-cyclical sectors. Their activist positions were also resilient: the presence of a fundamental catalyst helped weather the shortterm volatility. Merger Arbitrage continued to benefit from several bidding wars. They remain under-invested and tend to favor complex operations while remaining shy of the mainstream low-yielding deals.
Beta was the main L/S Equity funds’ driver. The summer air-pocket overshadowed a strong U.S. earnings season. Strong top-line growth and an elevated share of earning beats were not rewarded in markets. A majority of stocks headed down after their EPS announcement. Dominated by sector moves, stock differentiation was tame. The contribution from alpha was poor for U.S. funds. Similar conditions also prevailed for Japanese managers. By contrast, the European season was weaker. Growth numbers were decent but did not surprise strongly, with a higher Euro and a cyclical peak driving revisions down.
However, returns were more in-line with EPS announcements with notable single stock discrimination. Following a strong H1 and a recovery from the June factor rotation, managers are likely to reduce their exposure and lock in profits.
