External alternative multi management portfolios - March 2017

February was, overall, a happy month for investors. Most equity markets were strongly up around the world, apart from some countries like Italy, which had to deal with the instability of its financial system. Even European equities, which had been lagging since the beginning of the year, probably due to the uncertainties of their political Babel tower, returned close to 2% for the MSCI Europe. Fixed income investments performed well also, due to rates easing in most global regions.

The dollar strengthened against most DM currencies but continued to weaken versus major EM currencies like the Brazilian real and Mexican peso.

Commodities were mainly positive, especially precious metals and agricultural goods but excluding oil, which was roughly flat on the month.

During the month, the HFRX Global Hedge Fund Index returned +0.98%.

We have maintained our neutral stance on the strategy due to the anticipated rise in interest rates and its negative impact on borrowing costs. The recent renormalization continues to unfold and we are progressively transitioning to more pro-cycle managers, who, we believe, are likely to be best positioned to take advantage of the possible pro-business policies expected from the new administration in the US.

Global Macro

Over the past two months, stock markets in advanced countries – spurred on by expectations of fiscal stimulus and deregulation in the US and by solid incoming data – strengthened further. In 2017, the markets will see whether this optimism is justified as President Trump takes office. Even though the outcome of the Dutch election has maintained market stability, many other political and economic uncertainties remain (elections in France and Germany, credit in China, …). As mentioned previously, we believe significant shifts in asset prices will continue to occur as anticipations adjust to realities. The macro strategy will be able to capture and benefit from these wide market moves thanks to increasing volatility on rates and FX. Our Global Macro bucket may balance our net long exposure as it invests in different risk factors to our equity funds.

Quant strategies

We continue to favour short-term managers that may benefit from increasing trading flows and volatility as global investors will need to shift their portfolio allocation to adjust to the changing macroeconomic conditions (as mentioned above in the macro section). And we continue to avoid the slower strategies, which have become crowded due to their success in recent years. 2016 was a difficult year for quant managers, with low volatility, heavy sector rotation and short-covering. 2017 has been, up until now, a continuation of Q4 2016 leading to disappointing performances from less directional quant strategies. We decided to underweight these strategies until the market environment becomes a healthier womb for their implementation.

We are increasing our fixed income arbitrage allocation. The recent US election and the forthcoming elections in several European countries have increased volatility on interest rates. Our managers are benefiting from European basis trading and the widening of US swap spreads; conversely the dust is settling after the US money market reforms (Q4 2016) and the US Libor / OIS spread-tightening. There are fewer opportunities on the JPY RV side.

Emerging markets offer plenty of investment opportunities across asset classes (currency, interest-rate curve, single-name equity and debt). To exploit these opportunities, we have invested in global macro managers, some specialized in one given region, e.g., Asia, and in local managers that carry out fundamental analysis and make on-site company visits to pick stocks.

We are turning more positive on the strategy even if we remain mindful of the risks linked to the net long bias of event managers. The number of transactions could increase if some degree of deregulation is put in place. In such a case, large cash balances earmarked abroad by US corporations could be repatriated and possibly used for acquisitions.

The investments in European event managers that we are exploring will benefit from the need to bolt on growth.

In M&A arbitrage, we favour less static and more spread-trading-oriented managers, as average margins among deals have compressed significantly.

Distressed

We are more bullish on the distressed cycle, because of the potential increase in interest rates and the reduction in QE. So far, the energy sector, in which there has been massive issuance in recent years, has provided an attractive pool of opportunities, given the volatility of oil prices and its impact on these securities. Emerging markets may also offer opportunities due to the strength of the dollar and the hike in interest rates.   

We remain cautious on the strategy, although the US market has been more challenging than Europe. The quest for yield and the zero-to-negative rate environment have provided strong support for the asset class, and delivering performance on the short side is highly challenging.