Short USD and long emerging-markets biases generate the bulk of gains
The Global Macro strategy ended 2019 on a positive note. FX was generally a significant source of profits as managers benefited from a broad short US dollar positioning, notably against cyclical and emerging-market currencies. A long exposure to the British pound also generated gains following Boris Johnson’s victory in the latest UK general election. Long gold and base metals were profitable. Most managers who had previously adopted a bullish view on global equities and long positions in US and Chinese indices contributed meaningfully in December. Energy-related trades in equities or corporate credit generated profits, driven by a powerful year-end rally in crude oil prices. Emerging markets specialists generally outperformed thanks to a rebound in stressed EM sovereign credit or a long exposure to EM equities. Managers that maintained a defensive stance during the month, via long US dollar or short US equity indices trades underperformed.
Less macro noise and good stock selection drives returns
December was a very strong month for Equity Hedge managers, who continued to capture a large portion of markets’ positive returns. Markets benefited from a less noisy macro environment, as the US approaches a trade deal with China and the democrats' debate cooled down. All regions were in positive territory, led by China and EM, catching up from earlier corrections. In terms of factors, momentum lagged behind and penalised some managers, while growth continued to perform well. Cyclical sectors rallied during the month, driven by energy across the globe and materials particularly in China. Technology, and more especially semiconductors, performed strongly in this less volatile atmosphere. Alpha was strong, driven by stock selection and specific sector exposure. Although Healthcare was not the best-performing sector, several managers gained from good earnings releases and positive news.
Activists lead the way for Event Driven managers in December
December was a positive month for Event Driven managers although with dispersion across sub-strategies. Distressed and credit-oriented funds generated small positive returns, benefiting from a benign credit environment which saw HY spreads tighten in December. Default volumes decreased in December to a low since Jan 2019. Energy sector bond and loan defaults were at 11.8%, compared to 2.7% in 2018; however, default rates excluding commodities are lower year on year. Merger arbitrage specialists had mixed performances, with dispersion across deals (to name but a few, spread-tightening in Allergan/AbbVie and Novartis/Medicines and spread-widening in Sprint/T-MUS). Notable events in Europe included carmakers FCA and Peugeot announcing a friendly stock merger ($15.3bn) as well as Takeaway.com announcing its final offer for Just Eat in the food delivery battle with Prosus. Positive performance was recorded among long-biased activist and special situation managers, with gains also fuelled by the benign market environment.
Fixed income specialists capitalise on steepening US yield curve
Relative Value strategies posted good returns in December, amid a conducive backdrop for risk-assets. Sovereign fixed income managers benefited from an extension of the steepening of the US yield curve as well as from positive dynamics at the very front end of the curve. Regarding the latter, in the wake of the massive liquidity injection provided by the FED, the funding market showed almost no signs of stress, bringing funding spreads tighter (e.g. SOFR vs 30-day FED Funds). Municipal bond managers continued to profit from arbitrage opportunities arising from the heavy issuance of taxable bonds. Returns from volatility managers were more mixed. Some of them engaged in Relative Value between regions and performed well as realised volatility diverged considerably between the Hang Seng and S&P 500 indices. On the other hand, managers with long volatility exposure posted flat returns on average, as implied volatility steadied at a low level globally. Regarding structured credit, the ABS market remained mostly quiet, with spreads firm as 2019 ended. As far as MBS are concerned, the year ended on a calm and positive note.
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