Bullish trends in fixed income and gold drive gains
This month an escalating trade war between the US and China, failing Brexit negotiations and an inverted yield curve had many investors fearing the possibility of a global recession. Discretionary Global Macro managers’ long volatility profile provided positive decorrelation benefits against this month’s equity market correction. Managers gained from themes in US interest rates receivers, European government bonds, long gold (a high conviction trade across managers since the start of the year) and long US dollar positions against the euro and selected Asian foreign currencies. On the negative side, some managers suffered from a bull-flattening of the US yield curve. Emerging markets-focused managers were also impacted by the shockwave caused by a panic liquidation in Argentina. Incumbent President Mauricio Macri lost a primary vote on 11 August, a result which took investors by surprise. Fearing potential downgrades and defaults, investors dumped Argentine assets. Argentine government bonds in both local and hard currency crashed, triggering a contagion sell-off across emerging markets.
Systematic managers posted strong gains thanks to the strong trend in fixed income. Managers with long equity exposure generated losses although positions were substantially reduced throughout the month. FX trading garnered mixed results, while commodities returned gains on the back of long gold positions and short selected agricultural markets.
Global growth slowdown weighs on equities
August was a volatile month, with most equity indices tumbling early in the month before recovering most of the losses by the end. Equity markets suffered due to escalating trade tensions and global economic data which continued to disappoint. Despite the unfavourable macroeconomic backdrop, there was a wide dispersion of results among managers. Long/short managers posted mixed returns, yet most were able to protect capital against the downside. Market-neutral or low-net exposure managers were able to deliver alpha from long and short positions. In the US, the best performing sectors were real estate, utilities and consumer staples, sectors in which managers often had an underweight or net-short exposure. The worst performing sector was energy, which was hit as the oil price slid almost 6%. Managers have continued to maintain a defensive skew by staying underweight cyclicals, and have increased exposure to secular growth themes, e.g. aerospace, defence and software. Value biases underperformed growth and momentum biases, and the value-growth spread is now at its widest for a decade.
Spooked investors dump Argentine sovereign credit
Despite the difficult month for Event Driven managers, there was significant dispersion among sub-strategies. Credit exposure to sovereign Argentine debt and equity exposure to PG&E weighed on performance. Argentine bonds suffered severe losses following President Macri’s setback in primary elections. The loss has paved the path to political instability ahead of the upcoming elections in October, and investors fear rating downgrades in the light of growing concerns of a default. Distressed managers with credit and post reorg equities positions faced headwinds particularly in the energy sector on the back of the sell-off in crude oil. PG&E, a major position for several Distressed managers with exposure across the capital structure, came under pressure following the lift of a freeze on lawsuits tied to the 2011 Tubbs fire. This update has opened the door for victims pursuing claims against the company to start preparing for a trial and will continue to weigh on the utility company. Optimism surrounding talk of a new Trump Administration plan to end Fannie Mae and Freddie Mac conservatorship fuelled gains in the preferred equity of both companies. Constructive quarterly results and a positive attitude towards change by underlying portfolio companies helped some Activist managers, despite the negative equity market environment.
Convertible arbitrage a bright spot among sub-strategies
Relative value strategies performed relatively well during a volatile and difficult month for risky assets. Convertible arbitrage managers generated profits from new issues (e.g. Worldline, CerahCapital or Turning Point Brands) and from gamma trading. High volatility in equity names versus relatively stable, good credit quality bonds led to much of the gains. Volatility managers benefitted significantly from the steepening of the S&P 500 skew. This positive performance contrasts with recent sell-offs, such as during the fourth quarter of 2018, where the skew actually flattened, thereby hurting long volatility positions. All asset-backed securities sectors performed positively, with strong gains across auto loans and student loans. Municipals bonds continued to rally in sympathy with the broader bond market. Agency mortgage-backed securities also delivered positive performance, even though they underperformed relative to other high quality sectors. Finally, leveraged loans underperformed in August in response to poor market sentiment and retail outflows which have shown no signs of abating.
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