Macro

Yield curve steepeners detracted from the Global Macro strategy’s performance

Global Macro managers showed a fairly high level of return dispersion in September. On 22 September, the US Federal Reserve signalled that it might soon reduce its bond purchases and confirmed that a series of rate hikes could begin earlier than expected. This triggered a sharp sell-off across DM government bond markets. Some managers promptly increased rates paying positions in the US, UK and Europe in the second half of September, which turned out to be a significant contributor to performance as bond yields jumped towards the end of the month. Overall, managers who entered September with meaningful yield curve steepeners and outright short positions in the back-end of the US suffered during the first part of the month, had to reduce risk and failed to recoup the losses. Commodities, with long positions across the energy complex were a source of gains.

The US dollar strengthened over the month, both against DM currencies and EM counterparts. The risk allocation to FX remains relatively low across managers, so that currencies generally only had a modest impact on P&L. Despite short US Treasury and EM FX hedges, EM-focused macro were negatively impacted by a broad decline across EM credit and local rates markets in September.

Sharp reversals in Fixed Income, especially in Europe, combined with volatility across equity markets proved to be challenging for Systematic managers with contrarian models and a bias towards sectors such as equities and fixed income. On the other hand, managers with more risk deployed into commodities and positioned short EM FX registered gains during the month.

Equity Hedge

Equity Hedge managers navigated the market sell-off relatively well

September was a challenging month, equities sold off by more than 4% on a global basis and Japan was the only positive market that continued to recoup previous YTD losses. All the other regions were negative but maintained a comfortable positive note for the year. The main exception was China, which is down about 10% YTD. The drivers of this dark month included concern within China about one of its largest real estate developers, Evergrande, which is facing interest payment issues; rising input costs from labour to commodities; and the FOMC meeting late in the month when Chairman Powell indicated that the central bank could begin tapering as soon as their next meeting in November. This sparked a spike in long-term interest rates and a pullback in growth stocks with rich valuations. Investors rotated into more Value and Cyclical companies such as Financials and Energy. In general, Equity Hedge managers had previously reduced exposures and recently increased their short book, which enabled many of them to navigate this month relatively well. Nevertheless, longs underperformed shorts and alpha generation was challenging considering also that growth and momentum factors underperformed.

Event Driven

The market is adapting to the changes in the US antitrust landscape

Event Driven managers across equity and credit performed relatively well against a challenging market backdrop. Most Event Driven managers were flat to slightly positive for the month.

HY credit market saw spreads tighten slightly, and YTD performance is led by energy and Covid-impacted sectors, including Transportation and Gaming & Leisure. This benefitted managers who still held some credit dislocation positions from 2020.
In Merger Arbitrage, activity levels in September fell from a peak in August. The combination of increased concerns over the Delta variant and general market volatility dampened short-term deal making.

However, spreads in general compressed in early September as the market continues to recover from the Willis Towers Watson deal break and the market becoming more comfortable with the new reality of antitrust enforcement. Given the lower valuation and more stable regulatory environment in Europe and Asia, ex-US deals were the outperformers.

Relative Value

Are SPACs back?

Relative value strategies had a good month. Multi-Portfolio manager funds delivered strong performance, with a significant contribution from equities market-neutral strategies. Positive returns were heavily weighted to the materials, industrials and consumer discretionary sectors. Convertible arbitrage benefitted from a healthy issuance of new bonds with a number of very sizable deals from issuers globally.

Regarding fixed income arbitrage, inflation positions were additive to return as the market started to price in a higher inflation environment. SPACs arbitrage had a good month too. Good deal closing and IPO activity helped to restore confidence in the asset class. The broad SPAC market moved from discount, to premium, to trust value as a result, thereby generating healthy profit.

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