May performance drivers
Short fixed income detracts;
EM-focused managers outperform
A bullish stance towards Europe on the heels of the French election was generally a significant source of gains (long EUR, European equities). Long Japanese, UK and Emerging Markets (India) equities were also positive. The largest detracting trades last month included short/paying positions in US and European fixed income markets, long Brazil (hit by a violent political-driven sell-off in Brazilian financial markets on the 18th) and long crude oil. Managers who maintained a net short positioning in US equities underperformed. Despite the correction in Brazilian financial assets, managers with an emerging market focus (and generally long EM credit) outperformed again.
Long positions in equities and fixed
income offset losses in FX
CTAs managed to recover most of their losses by month end after a difficult third week in May. Equities - and to some extent fixed income - contributed positively to performance this month, mostly from the long side. FX continued to exhibit lack of clear trends and ended mostly in negative territory. Within quantitative strategies, short-term reversals proved particularly painful for most players in the universe, while diversification among regions failed to add much value.
Positive alpha generation remains strong;
growth outperforms value
Short positions performed well on the month while long positions in technology, growth and momentum names were a significant driver of performance. The biopharma sector generally detracted on the back of the new FDA Commissioner’s intentions to focus on “low cost alternatives”. The outperformance of growth versus value, which started in January, has expanded significantly since then to more than 10%. Net exposure to Europe has now stabilized after a strong increase since the beginning of the year.
Spreads tighten in M&A; special situations
post mixed results
Merger Arbitrage strategies enjoyed for the most part a positive month with spreads tightening in certain deals. The month also saw the closing of the Actelion / J&J and the Syngenta/ChemChina deals. On the other hand, special situations books reported more mixed performances with rather pronounced regional dispersion. While European-focused strategies benefited from relative political stability, US strategies were subject to increased volatility amid the uncertainty surrounding Trump’s policies.
Financials drive returns in
managers’ credit books
Emerging market sovereign debt detracted from managers’ books on the month given the latest political scandals implicating President Michel Temer in Brazil. On the other hand, credit positions focusing on the financial sector continued to add to returns. Also, certain Puerto Rico municipal debt positions were positive on the month as the restructuring process moves forward, while commodity-related post-reorganisation equities stabilized and were often positively skewed.
Structured credit adds to returns,
volatility strategies detract
Realized volatilities on major equity indices were subdued for the most part, especially in Europe, which did not help volatility trading strategies. Long/short credit books delivered mixed results, while structured credit contributed positively with gains from CLO, CMBS and legacy RMBS. In convertible bond arbitrage, managers benefited from a pick-up in new issuance and improvement in valuations on the back of underlying stock performance, tighter spreads and a modest intra-month increase in US volatility. Within equity, gains from risk arbitrage, special situations and equity Long/short books were partly offset by losses from quantitative strategies, especially those based on mean reversion.
Note: Returns are based on respective Eurekahedge index data estimates as at 28.02.2017 and can be subject to change
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