Macro

Systematic traders suffer a second consecutive month owing to fixed income and forex reversals

Discretionary Global Macro managers generated gains across asset classes. In fixed income, US yield curve steepeners and local rates receivers in emerging markets were positive. In FX, tactical long exposure to the British pound and selected longs in emerging markets generated positive returns. High-conviction long gold positions made positive contributions. On the negative side, long Europe periphery bonds and US energy equities detracted from performance. Most systematic trading managers suffered this month, and gave back some of the year-to-date gains. Trend-followers suffered the biggest negative impact in October, with losses concentrated in fixed income and forex more than offsetting gains made in long equities. Commodity trading was more mixed but also resulted in losses as positions in base metals and the agricultural market detracted from performance. Managers with diversified approaches did better by comparison in this environment, particularly those relying on fundamental inputs and implementing risk via relative value across asset classes.

Equity Hedge

Healthcare sector specialists rebound thanks to positive earnings

Even though the month was marred by political headlines in the US, positive progress on the US-China trade war and expectations of the upcoming rate cut by the Federal Reserve helped push equity markets to all-time highs. Earning season created greater dispersion between companies beating or missing market expectations. Attractive valuations and positive earnings surprises helped boost the lagging healthcare sector, buoying healthcare-focused managers and leading to gains on the rally. The sector continues to face political challenges from heightened uncertainty. Asian managers outperformed the rest of the regions while US-focused managers lagged. In Europe, managers exposed to cyclical sectors, in autos and speciality retail in particular, saw performance rebound. From a sector standpoint, healthcare and technology lead the pack while energy and consumer staples were marginally negative for the month. In contrast to September, growth and value factors were the largest positive contributors while the momentum factor detracted and continued to head lower.

Event Driven

Distressed managers holding PG&E bonds forced to cope with new wildfire claims

October presented once again significant dispersion among event driven sub-strategies. Managers with higher-rated credit positions outperformed, while exposure to the retail sector led performance and energy lagged. Default activity in the energy sector remains high, with a combined bond and loan default rate at 11.1%. This rate is the highest since 2016 when defaults peaked at 14.2%. PG&E bonds suffered extreme volatility towards month end, with a sharp sell-off due to potential new wildfire claims. The bonds recovered materially in the following days. Long positions across the capital structure in the GSEs detracted owing to continued uncertainty about the transition out of conservatorship. Argentine sovereign credit also detracted in October. Losses were front ended ahead of the general election on 27 October, which saw Alberto Fernandez become president-elect of Argentina. Within merger arbitrage, while average spreads continued to be subdued, cross-border activity increased. New proposed deals include Just Eat Plc, Takeaways.com and Prosus NV, the proposed USD 21 billion merger between Fiat Chrysler and Peugeot SA, and the proposed USD 16 billion take-over of iconic jewellery brand Tiffany & Co by LVMH. Large dispersion was recorded among activist managers.

Relative Value

Attractive opportunity set in municipal bond trading

Relative value strategies posted mixed returns in October. The mood on financial markets turned positive in October on the back of growing signs of a willingness to maintain a truce in the US-China trade war. Meanwhile, the Fed cut rates for the third time this year and signalled a pause, pushing the US 3m10y and 2y10y spreads well above negative territory – leading to gains for managers betting on a steepening of the yield curve. As optimism grew, volatility in rates and equities fell sharply, which benefitted managers holding short Vega positions. In securitised products, there was a relatively heavy supply of ABS and CMBS coming in which resulted in AAA spreads widening materially relative to comparable corporates. Most notably, CLOs came under considerable pressure in October,  potentially due to concerns about a possible recession, liquidity or increasing leveraged loan downgrades. Finally, despite municipal bonds lagging treasuries and corporate, managers benefitted from the heavy taxable supply which has created attractive trading opportunities.

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