Dovish language from the European Central Bank and language from the US Federal Open Market Committee, interpreted as positive on growth while remaining data dependent, drove markets higher last month, according to the latest Hedge Fund update from GAM.
Global equities rallied strongly with the MSCI World index up 8.0 per cent while the VIX, the so-called fear index, continued to decline from its August high. This continued decline of the VIX implies that investors are less concerned about shocks to the current slow-and-steady growth and low inflation environment and therefore are comfortable again owning risk assets. The US dollar index climbed 0.6 per cent for the month and the Barclays US Aggregate Bond index was flat. Hedge funds in aggregate were up 1.5 per cent as measured by the HFRX Global Hedge Fund index.
Hedge fund performance was broad-based across most asset classes, says Anthony Lawler, portfolio manager at GAM. “Moves higher in equities, credit, the US dollar and most sovereign debt all contributed to positive performance for hedge funds in October. However, risk exposure coming into the month was below average, therefore trader performance was positive but less than the magnitude of the asset class moves.”
Among the four main HFRX hedge fund strategies, positive performance came from Event Driven, Equity Hedge and Relative Value, each up at least 1.9 per cent while the HFRX Macro/CTA index was down 0.8 per cent. “Global macro and trend following managers had mixed results in October,” said Lawler. “Positions long equities and long the US dollar were helpful, but were offset by choppy moves in commodities and some currencies. Other strategies across equities, credit and relative value saw strong performance as asset values rose and relative value spreads moved favourably.”
Going into the final two months of the year, funds remain invested in favoured themes at meaningful levels of risk exposure, Lawler concludes. “Conviction trades remain in place coming into November. We see a small shift from currency exposures into equity long exposure from global macro managers, while they maintain a smaller long US dollar position even with the uncertainty around the Fed meeting in December. Many traders have built long corporate credit and European sovereign bonds positions expecting to be supported by both data-dependant and dovishly-biased central banks. Equity hedged managers have maintained their gross and net exposures, expecting continued opportunities for dispersion and rewards for stock selection.”
