January was a volatile month across asset classes, proving challenging for many hedge fund investors although most global macro investors were rewarded, with the HFRX Macro/CTA index up 2.0%.
Important asset class moves reflected expectations of slowing global growth, including strong rallies in US, UK and European bonds, oil down over 7%, and equities negative. The MSCI World index fell by 1.8% while the US S&P 500 index lost 3.0% in US dollar terms. Europe proved a notable exception with European equities strongly positive in local currency terms.
The key issues for investors in January largely centred around quantitative easing (QE) and currencies, according to Anthony Lawler, portfolio manager at GAM. “There was a lot of discussion around the surprise removal of the Swiss franc peg to the euro by the Swiss National Bank, but the impact from that move was contained mainly to one-off markdowns for dealers and investors caught on the wrong side of the trade. The moves that most widely impacted traders were the European Central Bank’s QE announcement and the broad strengthening of the US dollar,” he says. “The QE announcement drove European equities, sovereign bonds and credit up strongly in euro terms, while the euro itself weakened by more than 6% versus the US dollar. Our expectation is that currencies and rates will continue to be fruitful for macro managers. We anticipate continuing to see tactical longs in European credit and equities as these markets benefit from QE flows as investors move up the risk spectrum, and as we potentially see improving fundamentals.”
January did not produce the positive performance effect in equities that it has done historically, and instead in the US the month was characterised by weak investor sentiment, with US equities down and a strong rally in risk-off assets including US Treasuries, UK Gilts and core European sovereign debt. This risk-off environment resulted in negative performance for hedge funds outside of the macro sub-sector, with the HFRX strategy indices for event driven, equity hedge and relative value each returning negative performance for January. The broad measure of hedge fund performance, the HFRX Global Hedge Fund index, was down 0.3% in US dollar terms.
Performance in January was determined partly by geographic exposure given the divergence of returns between Europe and the US, says Lawler. “Within equity strategies, managers focused on Europe fared better given their positioning ahead of the QE announcement and the subsequent rally in European equities, with the exception of Greece. US managers generally struggled with volatility and negative returns from US equities in January. Credit managers saw both European and US credit rally, with the more interest-rate sensitive investment grade sector rallying ahead of high yield. Geographically, we see more value in US credit, where the challenges in the energy sector have caused some contagion selling across non-energy names over the past few months. We believe that this has created pockets of attractive yields outside of energy and attractive relative yields for global credit investors.”
