Macro managers maintain a bullish outlook and a reflationary stance in their portfolios
Global Macros produced mixed results in August, showing some degree of return dispersion. Following a challenging start to the month, with developed-market yield curves continuing to flatten, managers as a rule partially recouped losses in the last week. DM rates overall detracted from performance owing to yield-curve-steepening bets in the UK and the US, as well as outright back-end rates payers. Commodities were often the largest source of gains thanks to long positions focused on the energy sector (crude oil, US natural gas, EU carbon credits). In FX, gains from long the Brazilian real and Norwegian krone were largely offset by longs in the British pound, euro, Canadian dollar and Mexican peso. Of note, a small allocation to cryptocurrencies produced a meaningful, positive contribution in August. While risk levels were largely reduced, discretionary macro managers maintain a bullish outlook on the global economy and a reflationary stance in their portfolios. By and large, DM macros still expect inflationary pressures to persist, bond yields to move higher, global equities and commodities to extend their rally and the US dollar to weaken. Emerging-market specialists generated profits in EM sovereign credit as selected idiosyncratic situations benefitted from favourable developments (Argentina and Zambia).
Most systematic managers were unprofitable in August as gains in equities were outweighed by losses in the remaining asset classes. European bonds were particularly challenging as Eurozone inflation surged, largely because of rising food and energy prices. Long positions across the US curve were also unprofitable as Fed comments late in the month further eased investor concern over the tapering of crisis-era stimulus measures. The USD declined against higher-yield currencies. In energies, crude oil prices fell significantly early in August on declining demand, although prices recovered somewhat after supply concerns emerged on the back of Hurricane Ida.
Strong equity markets support the Equity Hedge strategy in August
August is traditionally not a good month for equity markets. This year, however, they closed at a record high on 31 August. Against that backdrop, Equity Hedge Funds captured a large part of the market upside, with alpha being generally broadly in line with the average fund’s net exposures.
Asia- and US-based managers fared better than their European peers. From a sector standpoint, healthcare-focused managers underperformed while more generalist/global managers outperformed.
An interesting environment for the Merger Arbitrage space
August was a positive month for Event Driven equities but a quiet one for most of the global/US-biased Event Driven credit managers. Most credit managers were marginally positive over the month. HY credit spreads saw modest tightening in August after spread widening in July on the back of Covid-19 fears. Within the merger arbitrage space, managers benefitted from some spread compression. Spread compression was mainly witnessed in the mega-cap deals (above $10bn) and to a lesser degree in the $5 to $10bn range. Managers took advantage of a compelling spreads environment to add to existing and new positions in early August. Views on the current opportunity set are not uniform, though: while M&A activity remains buoyant, recent FTC and DOJ appointees as well as developments between the US and China have had mixed reactions on merger specialists. Some are pounding the table and highlighting a great opportunity set while others are viewing increased spreads as true reflections of increased risks. Regulatory uncertainty is expected to have at least some effects on the timing of deal closures. Special situations managers continue to be boosted by a favourable market environment.
A difficult month for the SPAC arbitrage
Relative Value strategies delivered mixed returns. In general, multi-manager platforms performed well, mostly driven by equity market-neutral managers. Gains were heavily weighted to the consumer discretionary and materials sectors. Convertible arbitrage posted small gains, with high-delta equity alternatives, large caps and growth leading returns. SPAC arbitrage was the worst strategy, even though losses were fairly limited. The environment continued to deteriorate, with some deal breaks and an unfavourable deal-closing environment (SPAC trading below 10 upon deal close). As a result, the overall SPAC market ended the month trading below trust value.
HF Flash Report
This document is not intended for persons who are citizens of, domiciled or resident in, or entities registered in a country or a jurisdiction in which its distribution, publication, provision or use would violate current laws and regulations. In particular, investment funds or any other collective placement instruments which have not been authorised for public offering in the investor’s country of domicile may only be offered as private placements to qualified investors. Additional investment restrictions may be provided for in the official offering documentation (available upon request). The information and data furnished in this document are disclosed for information purposes only; the Pictet Group is not liable for them nor do they constitute an offer, an invitation to buy, sell or subscribe to securities or other financial instruments. Furthermore, the information, opinions and estimates in this document reflect an evaluation as of the date of initial publication and may be changed without notice. Information and opinions presented in this document have been obtained from sources believed to be reliable, and, although all reasonable care has been taken, the Pictet Group is not able to make any representation as to its accuracy or completeness. The value and income of the securities or financial instruments mentioned in this document are based on rates from the customary sources of financial information and may fluctuate. The market value may vary on the basis of economic, financial or political changes, the remaining term, market conditions, the volatility and solvency of the issuer or the benchmark issuer. Moreover, exchange rates may have a positive or negative effect on the value, the price or the income of the securities or the related investments mentioned in this document. Past performance must not be considered an indicator or guarantee of future performance, and the addressees of this document are fully responsible for any investments they make. No express or implied warranty is iven as to future performance. Investors shall conduct their own analysis of the risks (including any legal, regulatory, tax or other consequence) associated with an investment and should seek independent professional advice. The content of this document is confidential and can only be read and/or used by its addressee. The Pictet Group is not liable for the use, transmission or exploitation of the content of this document. Therefore, any form of reproduction, copying, disclosure, modification and/or publication of the content is under the sole liability of the addressee of this document, and no liability whatsoever will be incurred by the Pictet Group. The addressee of this document agrees to comply with the applicable laws and regulations in the jurisdictions where they use the information reproduced in this document. This document is issued by the Pictet Group. This publication and its content may be cited provided that the source is indicated. All rights reserved. Copyright 2020.