Discretionary managers start 2019 on a positive tone
Discretionary macro managers entered the New Year with tactically bullish stance based on views of oversold risk assets, the expectation of a more dovish US Federal Reserve as well as the implementation of Chinese economic stimuli. As such, long equity positions in the US and China generated significant gains. In FX, short USD positions against selected DM currencies (e.g. GBP, AUD) and EM currencies (e.g. BRL, MXN) were another source of profit. Finally, idiosyncratic exposure to EM local rates and credit as well as long gold positions also contributed positively. Managers with defensive positions generally underperformed.
Sharp trend reversals trip up traditional trend followers
A sharp shift in investor sentiment triggered trend reversals across many markets, particularly in equities, FX and energy. Traditional long-term trend followers as well as short-term systematic strategies struggled to navigate difficult market conditions, whereas managers employing diversified multi-model portfolios proved to be resilient. Throughout the month there was a broad rotation of risk from FX and commodities in favor of equities and fixed income. Losses largely stemmed from long USD positions, short energy, and short soft commodities. The majority of the risk was redeployed across US equities and European fixed income instruments.
Long-biased managers benefit from improved investor sentiment
The equity market rebounded in January largely led by more dovish than expected Fed statements as well as some signs of easing in the US-China trade tensions. Most managers delivered alpha however there was a high level of dispersion of returns. Long-biased managers who did not reduce their exposure during the Q4 deleveraging were the top performers. On the contrary, market-neutral managers who had previously benefitted from cyclicals exposure on the short side of their book ended the month detracting. Managers who reduced risk during the December sell-off did not fully participate in the wider market rally.
Event Driven managers capitalize on every strategy
All Event Driven strategies posted positive returns for the month. Special situations was the top performing strategy benefitting from the rising equity market, as did Activist managers. Despite an organic reduction in exposure to M&A in Q4 due to deal completions, managers were still able to generate good returns on M&A trades, thanks to a tightening of spreads. Distressed managers outperformed during the month driven by a considerable upward repricing of post reorg equities situations, especially in the oil and gas sector. Long-dated litigation positions such as Lehman and Icelandic banks were flat for the month.
Strong performance across Relative Value strategies
Relative Value rebounded strongly during the first month of the year following December's credit and spread widening driven sell-off. Volatility arbitrage strategies with a short vega bias benefitted from a sharp decrease in volatility in equities and fixed income. Merger arbitrage strategies gained from completion of legacy deals and stub positions. Convertible arbitrage strategies contributed positively thanks to strong demand for new issuances and credit spreads reverting from their prior month's historical highs. Overlay hedges were a net detractor across Relative Value managers.
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