March performance drivers
Late-month trend reversals take back earlier gains
Managers generally experienced a good start to the month, with long USDJPY and short US Treasuries positions contributing positively. But a series of trend reversals in the second part of March, accompanied by low volatility levels across asset classes, led most managers to give back earlier profits. Long European equity positions (notably via the Eurostoxx 50) were a significant source of gains whereas short EUR positions detracted from performance. Funds focused on emerging markets again outperformed, thanks to long positions in EM FX (MXN, RUB) and credit. In commodities, long crude oil caused losses while long US natural gas contributed positively.
FX books weigh on performance, equities add to returns
CTAs produced mostly negative returns for the month. FX weighed the most on performance, with short EUR, JPY or GBP positions against the USD, being generally the largest source of losses. Commodities produced mixed results. Shorts in agricultural markets, primarily soybeans and sugar, delivered gains. On the other hand, choppy conditions in precious metals resulted in losses. Long European equities was the major positive contributor (Eurostoxx 50, DAX).
US tech and European banks and autos drive returns
Long/short equity managers performed reasonably well in March, both in absolute and relative terms. In the US, managers’ exposure to the technology and consumer discretionary sectors worked in their favour this month, as the sectors sharply outperformed the market (+2.51% and +1.90% respectively versus -0.52% for the S&P 500). Many large technology names like Facebook, Adobe and Apple in particular registered handsome gains. In Europe, banks in the periphery had outstanding performances while materials lagged the market. Managers benefited from their exposure to stocks in the auto sector, such as Peugeot, Valeo and Inchcape.
Europe takes the lead in M&A after a decade
Special situation book performance was overall positive despite the last-minute withdrawal of the US healthcare bill, that put into question Trump’s ability to implement the more market-friendly elements of his agenda. Managers with European exposure tended to outperform on the month. M&A performance was mixed, as the general spread tightening was somewhat offset by some specific situations detracting, such as Rite Aid/Walgreen and Zodiac/Safran. Deal flows continue to be substantial with 2442 reported deals announced worldwide for a dollar value of $630bn. For the first time in a decade, the dollar volume of announced deals with European targets exceeded that of US targets in March ($316bn vs $169bn).
Commodity-related positions suffer from
larger oil inventories
After several months of strong performance, Distressed managers registered losses in March. Long/short credit managers generally outperformed classic Distressed strategies. Puerto Rico bonds detracted on the month, but the main sources of pain were commodity-related credit positions as increased oil production and rising inventories brought their rally to an end. Structure credit performance was mixed, with CLO mezzanine debt being the primary contributor.
Mixed results as Europe outperforms the US
in equity and credit
Credit-related strategies were impacted by energy positions which partially retraced recent outperformance, largely on sector weakness. HY credit suffered from negative technicals, facing large outflows from US HY ETFs, whereas structured credit made a small positive contribution overall. Spreads trended sideways across sectors, but positions benefited from interest payments. Volatility trading strategies suffered from a substantial decrease in volatilities, especially in equity indices. Convertible bond arbitrage delivered positive returns. March saw strong new supply volumes ($11.9bn), and managers captured the new issue discount in attractive deals. Valuations were under pressure however early in the month as the market digested all this new issuance, but recovered in the last week.
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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