Discretionary traders seek diverse sources of alpha
For Global Macro managers, the best performing trades include interest rate receiving positions in the front-end of the US yield curve, tactical short positions in US equity indices, selected short Emerging Market currencies, as well as long gold positions. On the negative side, long exposure to crude oil and Emerging Markets credit tended to detract from performance. Emerging Markets focused managers often outperformed thanks to local rates receivers in Brazil. Credit-oriented managers benefited from a rally in GSE preferred shares. Global Macro managers broadly remain cautiously positioned, with relatively low risk levels and a tactical trading approach.
Trend followers lose in equity and commodity strategies
Systematic trading managers gained from long fixed income exposure, and made losses from long equities and positions in selected commodity markets. The revival of global trade tensions led to sharp reversals in long-standing equity market trends, while equity market-neutral and statistical arbitrage strategies performed well. Reversals in energy and agricultural markets negatively impacted most trend following strategies, the latter being driven by wet conditions and delayed planting conditions for row crops in the United States. Exposure to alternative markets such as interest rate swaps and coal provided diversification benefits among more traditional systematic players.
Directional exposure proves costly during market turmoil
Net exposure remains a key component for performance this month with many market neutral funds able to deliver positive, decorrelated returns. Sector rotations from Value and Cyclical into Growth and Defensive had a material impact on factor-sensitive managers, with the spread between Value and Growth now at an unprecedented level. Managers with directional exposure to sectors such as semiconductors, automobiles & parts, technology, energy and banks suffered more than others. Despite the negative market backdrop, higher single name dispersion has created a richer environment for short stock picking and alpha generation.
Idiosyncratic positions did not help overall performance
Event Driven managers suffered in May, with every sub-strategy detracting from performance. Managers with an Activist mandate and Special Situations sub-strategies were particularly impacted by the broader market reversals, as did other strategies with high equity and credit sensitivity. Within Distressed managers, those with long credit exposure in energy and in mining were in particular hit by downward repricing. Merger Arbitrage ended the month with negative returns, mainly due to spread widening.
True decorrelation among sub-strategies
Relative Value managers were broadly able to decorrelate from broader equity and credit market turmoil ending the month with a slightly negative performance, with a variety of outcomes among sub-strategies. Amid the inversion in the 3m10y Treasury curve reaching a new peak in this cycle, the structured credit market remained relatively unscathed. Fixed Income asset backed strategies performed well in particular given their safe-haven status, as did Collateralized Loan Obligations.Convertible arbitrage strategies with exposure to the energy sector as well as in US and Asia tended to underperform, while managers trading volatility managed to generate profits from VIX relative value and dispersion trading. Statistical arbitrage strategies in equities were positive over the month, taking advantage of market dispersion.
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