In the first two weeks of October there was a sharp decline in momentum that hurt many of systematic hedge funds, but the trend largely reversed in the last two weeks and most funds finished flat or slightly up for the month.
That’s according to Deutsche Bank's Global Prime Finance Monthly Hedge Fund Trends report for November 2015, which says the firm expects further market volatility driven by weak macro conditions, uncertainty around the Fed rate hike, and continued regulatory scrutiny on M&A activity. All strategies significantly underperformed both the S&P 500 (+8.3 per cent) and the MSCI World Index (+7.8 per cent) in October. However, most strategies still continue to outperform these indices year-to-date, with the average fund across all strategies up 1.9 per cent. Market neutral and CB & volatility arbitrage strategies are leading the pack at +4.53 per cent and +3.49 per cent respectively.
Deutsche Bank’s Hedge Fund Capital Group spoke with 18 investors in Texas, including foundations, family offices, fund of funds, and pensions. These investors are interested in uncorrelated strategies, such as fundamental equity market neutral and discretionary macro, as well as sector-focused equity long/short managers in Healthcare, TMT, and Consumer. In Europe, Finnish and Swedish pension fund allocators are driving the increase in appetite for equity market neutral and trend risk premia strategies, and there is steady interest in event-driven strategies as a number of investors actively monitor the space. In Asia, high-net-worth individuals from China and Europe continue to set up family offices in Singapore in order to expand their exposure in the region.
US equities rallied in October as funds unwound their positions. Materials, Energy, and Info Tech sectors saw the greatest monthly drop in short exposure, led by single-name standouts, while Telecom witnessed net addition to short exposure of +5.3 per cent.
The MSCI World 30-day volatility decreased 27.3 per cent over the month, ending at 16.4 per cent on October 29. Gross fundamental equity exposure decreased slightly from 2.81 to 2.76, while net equity exposure decreased from 0.70 to 0.67.
On 2 October, the European Securities and Markets Authority (ESMA) issued draft regulatory technical standards (RTS) for the mandatory central clearing of over-the-counter Credit Default Swaps (CDS) under the European Market Infrastructure Regulation (EMIR). Under the draft requirements, two iTraxx Index CDS will be subject to mandatory clearing. On 20 October, the Financial Stability Board (FSB) Regional Consultative Group for Asia met in Hong Kong to discuss their views on vulnerabilities affecting financial systems, their potential impact on Asia and possible policy responses. On market financing and asset management activities, members called attention to risks of a market sell-off due in part to the unwinding of unconventional monetary policies and potentially under conditions of reduced market liquidity in fixed income markets. On 30 October, the US Agencies published a final rule to implement minimum margin and capital requirements for covered swap entities (CSEs) intended to offset the risk of uncleared swaps transactions on the financial system.
