External alternative multi management portfolios - October 2016

In September, financial markets posted mixed returns.  Commodities continued further into positive territory. At the equities level, performances were a mixed bag as well.  The decline of Deutsche Bank mid-month weighed on global equity returns, but overall sharp gains in Technology, Energy and commodities-linked securities helped make up for declines in Financial and Consumer discretionary areas.

Rates in the US and Europe ended the month almost unchanged. The USD declined against the EUR, ending the month at 1.12. It also depreciated against the Swiss Franc (-1.27%) and the Yen (-2%).  On the flipside, it gained against the British pound and the Real.  Over the month, Energy & Metals along with Oil and Copper advanced.

In this environment, the HFRX Global Hedge Fund Index EUR posted a 0.37% gain in September.

We remain positive on the strategy despite the recent disruptive market conditions overall in 2016. We have selectively dialled down exposure in response to the difficulties experienced by some of our more fundamentals-driven managers. The recent renormalization benefited our selection of L/S market neutral managers.

Global Macro

These markets are extremely difficult to navigate and are exhibiting volatility spikes driven by policy adjustments. Despite whipsawing reversals on a large array of asset classes such as commodities, equities and FX, our bucket’s performance is resilient. Our recent hire in the macro space posted a strong gain in September in connection with positions in interest rates, equities and also in a long Russian Ruble position.

Quant strategies

Most quant strategies have been struggling to generate positive performances year-to-date. Short-term CTAs have outperformed their longer-term counterparts, except for this September, due to sharp trend reversals and choppy markets. We are closely monitoring factors such as value, momentum and growth, as this space has become increasingly crowded with both alternative strategies and 130/30 long-only products. Our pattern-recognition fund posted a strong September contribution. We continue to favour short-term managers and are avoiding slower strategies that have become crowded due to their success in recent years.

Increasing central bank activity, the on-going asset collection by trend-following, coupled with the decline of banks’ proprietary desk activity, are positive for our 2016 strategy. Our managers are benefiting from European basis trading and the widening of US swaps spreads in the run-up to the money market reform. There are fewer opportunities on the JPY RV side. 

Emerging markets, while continuing to be very volatile, offer some very specific opportunities:

• The transition towards a domestic-demand-driven economy is just getting started, especially in China. The recent turmoil proves that GDP growth remains fragile in this migration from a fixed assets linked growth. Besides, we see the lack of clarity at central-policy level as another reason to be extremely cautious regarding China.
• The South American bond markets have rallied strongly this year: Venezuelan sovereign bonds have been supported by the oil market, while Brazilian corporate credit and Argentine sovereign bonds have benefited on more idiosyncratic political grounds.
• Our managers, benefiting from FX/rate dislocations, have been able to navigate rough market conditions.

• While we believe that this strategy continues to make sense, its net long bias nevertheless puts it at risk in cases of strong market disruptions. Even if the risk/reward is proving less interesting now than in recent years, our managers posted strong returns in Q3 2016.
• In M&A arbitrage, we favour less static and more spread-trading-oriented managers as the average margin of deals have compressed significantly. 

Distressed

The distressed debt offer is still extremely limited for the time being. We do not see any immediate opportunities in this strategy. Nevertheless, the energy sector, in which massive issuance has taken place in recent years, may soon become an attractive pool of opportunities given the massive disruption in oil prices and its impact on these securities.

Although the US market has been more challenging than Europe, the quest for yield and the zero-to-negative-rate environment have strongly supported the asset class and the ability to perform on the short side is very challenging. We remain cautious on the strategy.