The Fed’s unexpectedly hawkish message hit Discretionary Global Macros

Overall, June was a tough month for Discretionary Global Macros. Managers were initially wrong-footed by the sudden decline in government bond yields in the first fortnight of the month, and subsequently suffered substantial losses from their reflationary-driven positioning after the Fed meeting on 16 June. The surprisingly hawkish message, in which the Fed disclosed plans to scale back bond purchases and predicted two interest rate hikes by the end of 2023, caused market participants to markedly reprice inflation expectations and trades related to a “global reflationary” scenario were badly hit. In particular, yield curve steepeners in the US (2-10,s, 5-30s), break-even inflation rates, short USD positions against the EUR, GBP, AUD or CAD, long copper and precious metals all detracted meaningfully from performance. Long European financials also generated losses. On the positive side, a long exposure to crude oil and EU carbon emission credits continued to produce gains. While risk levels were significantly reduced, managers are generally sticking to their reflationary outlook. Emerging Markets focused managers were also negative in June, as they were negatively impacted by long EM FX trades in the third week of the month and short US Treasury hedges. Systematic managers posted mixed results as the short US dollar and fixed income instruments reversed against the prevailing trend. Commodities scored positively as energies continued to trend higher while equities proved to be more of a mixed bag depending on regional exposure.

Equity Hedge

Growth outperformance supported Equity Hedge managers

June was a strong month for equities, and Equity Hedge managers benefitted from positive tailwinds with their long book outperforming the market and their short book. Alpha does not appear to be massive, but the reversal of recent rotation towards more value and cyclical companies is borne out by data. Against this backdrop, Growth outperformed by more than 6% during the month, recouping almost all YTD gap. Technology was the strongest sector, defensives (Healthcare and Communication) did well, while Cyclicals such as Materials and Financials lagged behind. Finally, Energy continued to be supported by rising oil prices and remains the best sector for the year.

Event Driven

A supportive outlook for special situation managers

HY bond yields declined to a record low in June, the lowest point since October 2018. Lower quality, CCC bonds, outperformed again. Most of the Event Driven credit managers have performance in line with the broader HY bond index gains YTD, with strength in the energy and transportation sectors as the main sources of performance drivers. Default activities picked up in June, and the outlook for special situation managers remains positive, with increased corporate activity and some beta tailwind. For merger arbitrage specialists June was a mixed month. M&A activity (fuelled by strategic deals) remains strong on both sides of the Atlantic, and the same is true of annualised merger spreads. While the pandemic has been a catalyst for many M&A deals over the past year, there is no sign M&A is running out of steam. Deal bumps are still a welcome feature of the current investment backdrop, with more than 20 deals bumped in Europe alone since the autumn of 2020. As the Biden administration begins to push its policies, a regulatory overhang may potentially weigh on the strategy.

Relative Value

A good month for convertible bond and SPAC arbitrage

Relative Value strategies generated moderately positive return in June. Convertible bond arbitrage managers benefitted from the outperformance of growth sectors and high-delta bonds. SPAC arbitrage performed well as managers capitalised on a rebound in IPO activity and de al announcements. Fixed income arbitrage continued to be a challenging area. Managers were broadly hit by the Fed’s unexpectedly hawkish narratives which caused the yield curve to flatten and inflation expectations to drop. Short rate volatility positions helped to claw back some of the losses. Regarding Equities, both implied and realised volatility kept falling, even though they were already very low. Long vega/long gamma positions were hit as a result. Within municipal bonds arbitrage, positions related to the permanent relocation of whitecollar workers for Covid-19/tax reasons continued to offer good trading opportunities.

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