>> 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.
