Macro

The reflation trade took a pause over the month of April

G10-focused discretionary Global Macro managers were impacted by the pause in the reflation theme. Yield curve steepeners in the US, UK and Europe as well as shorts in the 10-year part of the curve detracted from performance. In equities, gains from long exposure to Europe and the UK were offset by longs in Japan and financials indices. In April, FX saw a reversal of Q1’s trends, with the US dollar generally weakening against most counterparts. FX trading produced mixed returns: long USD/ JPY and long GBP/EUR generally posted a negative contribution while long commodity currencies (CAD, AUD and NOK) and selected EM currencies were positive. In commodities, a thematic long exposure to copper, driven by an optimistic view on the global economic recovery and demand for electric vehicles, produced significant gains. Following a challenging first quarter of the year, emerging-market-focused managers rebounded somewhat in April. Local rates positions and selected sovereign credits were the largest sources of P&L. Most Systematic managers ended the month in positive territory as they continued to profit from equity market exposure. The rally in commodities, especially in agricultural markets, added to the overall performance as well. Fixed income modestly detracted from returns.

Equity Hedge

Equity Hedge managers beneffited from the market rotation

Equity markets were very strong in April and enjoyed a particularly impressive start to the month. The US was the best region, followed by Europe and Asia ex-Japan, which was slightly down. Globally, many of the sectors that had previously been laggards on a YTD basis bounced back. These included technology and consumer discretionary, which is in line with the trend of growth outperforming value. Q1’s reversal in favour of more cyclical names and smaller caps, mainly in energy and industrials, started to fade in April. Nevertheless, cyclicals continue to lead markets this year. Inflation and commodity prices remain the areas to be monitored, as their impacts on growth companies’ profitability and on earnings in general could be significant. In this environment, Equity Hedge managers did well during the month as their books generally benefited from this market rotation. Net exposures shifted into Europe at the expense of North America, while Asia-focused managers re-increased their gross exposures back to elevated levels.

Event Driven

A very good month for High Yield investors

In April, Event Driven Credit and Equity managers posted strong performance. High-yield bond yields declined to a record low in April and spreads to a multi-year low as the economic recovery accelerated. Meanwhile, quarterly earnings exceeded expectations and Treasury yields eased from a one-year high. With the decline in rates, April provided the best return in 2021 for high-yield investors. Leveraged loans rallied in April amid an improved tone for risk assets, ongoing retail inflows and new CLO origination, which is tracking at record levels. Merger arbitrage specialists benefited from spreads tightening during April. New deal-flow activity remained robust. Apart from the competing bid for Kansas City Southern (a $29 billion railway deal), with Canadian National coming in with a bid of 21% over the implied value, there was also the £17.4bn Thermo Fisher acquisition of PPD, both being good examples of the renewed flow the M&A space has been witnessing in recent months. Special situations and Activist Equity managers benefited from the tailwind of a positive equity market backdrop.

Relative Value

Low volatility hits Relative Value managers

Relative Value performance was broadly muted as volatility fell across the board. After an aggressive move higher in Q1, rates stabilised in April and found a range. Trading opportunities were scarce and fixed income arbitrage managers struggled as a result. Volatility arbitrage had a tough month as realised volatility remained at an extremely low level and implied volatility dropped further. Dispersion strategy was particularly hard hit. In contrast, index volatility was bid up by institutional investors keen to protect their equity books. Meanwhile, single-stock volatility dropped under the pressure of relentless issuance of structured products. The same phenomenon affected convertible strategy. Gamma trading opportunities dried up as single-stock volatility stayed low, while at the same time the drop in implied volatility caused hedged convertible positions to incur losses. After a difficult month, the SPAC market showed more stability, thereby allowing managers to make up some of their losses in March from a mix of announced deals and active trading in the secondary market.

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