Global equity markets continued on their upward trend from mid-October, finishing November up 2.1%, as measured by the MSCI World index in US dollars.
US Treasuries and core European bonds also rallied. Against this backdrop, coupled with a strong US dollar and downward trending oil prices, hedge funds performed positively. Global macro and trend following strategies were the best-performing hedge fund subsets in November, following strong performance in October. The HFRX Macro/CTA index was up 1.7% for November, while the broader HFRX Global Hedge Fund index gained 0.3%, both in US dollar terms.
Anthony Lawler, portfolio manager at GAM, says investors who held onto the trades and themes that had begun to work in late October were rewarded again in November: “The trades that were most profitable for investors in November were largely asset class trades, and those tend to be the domain of global macro managers. A prominent example comes from the currency markets, where the US dollar has strengthened against the euro and the yen for five consecutive months. These currency trades remain favoured allocations and have contributed to the positive performance of global macro strategies since July.”
Investors that systematically invest in trends were the top performers for November, continues Lawler. “Trend followers had a very good month. On average, about half of their performance was generated from short oil positions, about one quarter from longs in US and European fixed income, with the remainder attributable to long US dollar and long equity positions.”
For fundamental investors in equities, the global rebound in risk appetite since mid-October proved supportive, says Lawler: “Event driven equity positions held firm in November after their sell-off in October, while equity hedge managers generally had a positive month, benefiting from the rally in equities. Many funds held short positions in energy-related names, which also contributed to performance.
“We have noticed a change in investor sentiment toward European equities as we come into December. Relative to US stocks, European equities have been attracting more interest, based on lower relative valuations and a belief that economic conditions are no longer deteriorating in Europe. Gross exposure levels remain near year-to-date highs, while net exposure levels are elevated, suggesting that risk assets should perform positively through year-end.”
Lawler says that GAM expects gross exposure to stay near current levels in December. “Seasonally, we often see gross exposure being taken down by late November or early December, but that has not been the case this year. Thus investors expect that recent trends of strong equities, a strong US dollar and even a strong fixed income asset class may continue into the New Year. We may be at the beginning of a subtle change in positioning in favour of European equities, which might prove important, but aside from that, aggregate discretionary positioning remains largely unchanged. For systematic trend followers there are two additional differentiated exposures: short oil and long bonds.”
