External alternative multi management portfolios - September 2016

The global financial markets posted overall positive returns in August. In the US, energy-related equities posted substantial gains while the market ended the month flat overall.

Positive US employment datapoints led to a rise in US treasury yields. On the FX side, the USD ended the month almost flat against the EUR and posted a small gain against the JPY. Energy commodities went up strongly, with sizeable gains for Oil. The HFRX Global Hedge Fund Index closed the month on a flat note.   

We continue to be positive on the strategy despite the recent disruptive market conditions. We have selectively trimmed risk in response to the difficulties experienced by some of our more fundamentals-driven managers. The current risk-on/risk-off environment continues to be challenging for these managers. Nevertheless, we’ve made sizeable returns recently from more net-long managers, in particular in the tech and energy sectors. Across our selection, we continue to overweight managers who proactively manage their factor risk and style exposures. 

Global Macro

These markets are extremely difficult to navigate and are exhibiting volatility spikes as policy adjustments are taking place. 2015 proved challenging for the strategy and 2016 continues to unroll on an identical note, with sharp whipsawing reversals on a large array of asset classes such as commodities, equities and FX. That said, we recently hired a top-tier macro manager with whom we had been invested in the past. His strong expertise in the EM arena has enabled him to fare extremely well in this environment. This addition is highly complementary to our other discretionary manager and to the core quant Macro selections in our bucket.

Quant strategies

Trend-following strategies are again benefiting from the strengthening of some trends, especially on the bond markets. Fundamental Quant Equity Market Neutral funds are still being impacted by deleveraging on the equity markets. We are closely monitoring factors such as value, momentum and growth, as this space has become more and more crowded with both alternative strategies and 130/30 long-only products. Statistiscal Arbitrage and pattern-recognition funds continue to struggle this year in a context of correlation changes, unwindings and short-covering. Short-term CTAs have done consistently well. We continue to favour short-term managers and are avoiding slower strategies that have become crowded due to their success of 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 Europe, US and Japan dislocations, as well as significant other dislocations between the credit indices and their constituents. 

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 transitioning phase. 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.
• Within M&A arbitrage, we favour less static and more spread-trading-oriented managers. 

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.