Most hedge funds posted positive results in February as credit, fixed income and developed market equities rallied and provided a favourable backdrop for event driven, equity hedge and relative value strategies.
Anthony Lawler, portfolio manager at GAM, says that an important positive contributor to these strategies was managers continuing to hold their conviction trades, despite January’s choppy waters.
Hedge funds were up 1.6 per cent for February, as measured by the HFRX Global Hedge Fund index in US dollar terms.


“Our view that 2014 was likely to prove to be choppy with more dispersion, and therefore more likely to reward alpha, remained valid in February. So far this year event driven and equity hedged managers have out-performed broad equity indices,” says Lawler.
Year-to-date through the end of February, the HRFX Event Driven index was up 2.9 per cent and the HFRX Equity Hedge index was up 1.6 per cent, compared to the MSCI World index up 1.2 per cent, all in US dollar terms.
“Conversely, global macro and CTA managers posted mixed results – several longer-term conviction trades detracted from performance, such as long US dollar and the Japan reflation,” says Lawler.

Overall, active investors view equity markets as attractive, but they retain a degree of caution on valuations.
“Investors generally hold the view that equities are at or above neutral valuation territory. They got here primarily through multiple expansion and now real growth is needed to drive equities higher. Despite this, event driven and equity hedged managers continue to see opportunities for stock and sector selection and corporate events. The cautious view on valuations yet positive view on alpha is evident from managers running high portfolio gross exposure, while portfolio net exposure to market risk is below peak levels. In a new development, we are seeing equity hedge managers being more active on the short side. We are also seeing event driven managers add to positions – corporate activity levels increased and pending event deals generally traded higher – contributing to performance in February.”


Credit continued to be well supported in February with a lack of new bond issuance helping to drive existing credit higher as money flowed into high yield and investment grade names.
GAM's outlook for the rest of 2014 remains unchanged and investors should be prepared for choppy waters, suggests Lawler.
"Volatility is likely to continue to be more of a feature this year, but there are arguably investment opportunities especially within equity long/short and event driven approaches. We continue to expect global macro strategies to find good risk/reward opportunities later in the year as some trades like Japan reflation re-establish themselves. We are already seeing green shoots appear because divergences in global policy paths and growth spell opportunity for alpha in fixed income and currency markets."
