Global Macro managers reduce risk heading into the new year
The Global Macro strategy was negative overall in November, with most funds posting small losses. In fixed income, Europe periphery bonds (Italy, Spain, Greece) and local rates receivers in Latin America detracted from performance. In FX, several managers had adopted a bearish view on the US dollar and increased short US dollar exposure against both developed-market and selected emerging-market currencies. Long the euro, Australian dollar and Brazilian real were the main losing trades. A high-conviction long gold position also had a negative contribution. On the positive side, long global equity indices and long positions in the Eurodollar futures curve were the predominant sources of gains. As we are approaching year-end, macro managers are, by and large, running their portfolios with significantly reduced risk levels. Systematic managers posted mixed returns, with gains in equities and currencies outweighing losses in commodities and fixed income.
Health care sector continues to drive outperformance
Largely led by the S&P 500, global equity markets were up strongly on the month, with the exception of selected Asian and emerging markets. Managers exposed to the best-performing sectors, information technology and health care, handsomely outperformed their peers. In the United States, small and large cap traded within a tight range while in Europe small cap rerated from trough multiples and performed about twice as much as larger cap. European managers who have a directional and small-cap bias posted strong returns for the month. Asian markets had mixed results, with Japan-exposed managers performing better on average. From a factor standpoint, value style was ahead of momentum, quality and low volatility but gave back most of its advance around mid-month, while momentum trended higher by month-end. From a technical point of view, the volatility indices in US (VIX) and Europe (V2X) ended the month at very low levels, which demonstrates a high degree of confidence from market participants.
Pick-up in cross-border activity despite fears of global economic slowdown
November was a positive month for Event Driven managers although with great dispersion across sub-strategies, while Distressed managers generated muted performance. Intelsat, a European satellite communications company, suffered heavy price pressures after negative regulatory headwinds leading to losses for some managers. High-yield credit rallied but the bifurcation of higher-quality credits outperforming lower-quality issues continued. This month witnessed an increase in cross-border M&A activity. Spreads in Europe widened into year-end, with the UK general election on 12 December having an impact on general attitude to risk-taking. Just Eat, Takeaway.com and Prosus remain the biggest potential focuses for another offer before year-end. In the US, risk continued to be priced at notably tight terms, with wider spread outliers mainly due to the size of the deal or antitrust risk. Positive performance was recorded among long-biased activist managers. In Europe, special situation-focused funds benefited from the tailwind of increased private equity interest.
Implied volatility drips to rock-bottom
Relative Value strategies posted modest but positive returns in November. Promising news flows regarding a “phase one” trade deal between the US and China plus a favourable outcome pertaining to the upcoming UK general election fostered risk-taking and caused implied volatility to collapse further. The fall in volatility benefits managers holding short vega positions in fixed income instruments. Concerning the short end of the US yield curve, some managers generated profits from cheapening of Treasuries versus overnight indexed swaps (OIS), caused by the first Federal Reserve term repo operation being oversubscribed. Funding pressure is expected to grow by the end of the year. In the municipal bond market, November was another heavy-supply month. Dealers face several challenges to place so much issuance in a short period of time as well as Treasuries remaining in a tight range. Despite difficult market conditions, managers continue to be able to source attractively priced bonds for heir portfolio. Last but not least, leveraged loans outperformed high-yield bonds after lagging behind in October.
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