Macro managers maintain a bullish outlook and a reflationary stance in their portfolios

Global Macros produced mixed results in August, showing some degree of return dispersion. Following a challenging start to the month, with developed-market yield curves continuing to flatten, managers as a rule partially recouped losses in the last week. DM rates overall detracted from performance owing to yield-curve-steepening bets in the UK and the US, as well as outright back-end rates payers. Commodities were often the largest source of gains thanks to long positions focused on the energy sector (crude oil, US natural gas, EU carbon credits). In FX, gains from long the Brazilian real and Norwegian krone were largely offset by longs in the British pound, euro, Canadian dollar and Mexican peso. Of note, a small allocation to cryptocurrencies produced a meaningful, positive contribution in August. While risk levels were largely reduced, discretionary macro managers maintain a bullish outlook on the global economy and a reflationary stance in their portfolios. By and large, DM macros still expect inflationary pressures to persist, bond yields to move higher, global equities and commodities to extend their rally and the US dollar to weaken. Emerging-market specialists generated profits in EM sovereign credit as selected idiosyncratic situations benefitted from favourable developments (Argentina and Zambia).

Most systematic managers were unprofitable in August as gains in equities were outweighed by losses in the remaining asset classes. European bonds were particularly challenging as Eurozone inflation surged, largely because of rising food and energy prices. Long positions across the US curve were also unprofitable as Fed comments late in the month further eased investor concern over the tapering of crisis-era stimulus measures. The USD declined against higher-yield currencies. In energies, crude oil prices fell significantly early in August on declining demand, although prices recovered somewhat after supply concerns emerged on the back of Hurricane Ida.

Equity Hedge

Strong equity markets support the Equity Hedge strategy in August

August is traditionally not a good month for equity markets. This year, however, they closed at a record high on 31 August. Against that backdrop, Equity Hedge Funds captured a large part of the market upside, with alpha being generally broadly in line with the average fund’s net exposures.

Asia- and US-based managers fared better than their European peers. From a sector standpoint, healthcare-focused managers underperformed while more generalist/global managers outperformed.

Event Driven

An interesting environment for the Merger Arbitrage space

August was a positive month for Event Driven equities but a quiet one for most of the global/US-biased Event Driven credit managers. Most credit managers were marginally positive over the month. HY credit spreads saw modest tightening in August after spread widening in July on the back of Covid-19 fears. Within the merger arbitrage space, managers benefitted from some spread compression. Spread compression was mainly witnessed in the mega-cap deals (above $10bn) and to a lesser degree in the $5 to $10bn range. Managers took advantage of a compelling spreads environment to add to existing and new positions in early August. Views on the current opportunity set are not uniform, though: while M&A activity remains buoyant, recent FTC and DOJ appointees as well as developments between the US and China have had mixed reactions on merger specialists. Some are pounding the table and highlighting a great opportunity set while others are viewing increased spreads as true reflections of increased risks. Regulatory uncertainty is expected to have at least some effects on the timing of deal closures. Special situations managers continue to be boosted by a favourable market environment.

Relative Value

A difficult month for the SPAC arbitrage

Relative Value strategies delivered mixed returns. In general, multi-manager platforms performed well, mostly driven by equity market-neutral managers. Gains were heavily weighted to the consumer discretionary and materials sectors. Convertible arbitrage posted small gains, with high-delta equity alternatives, large caps and growth leading returns. SPAC arbitrage was the worst strategy, even though losses were fairly limited. The environment continued to deteriorate, with some deal breaks and an unfavourable deal-closing environment (SPAC trading below 10 upon deal close). As a result, the overall SPAC market ended the month trading below trust value.

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