Investors retreated from equities and turned to safe-haven assets in January as disappointing Chinese and emerging market numbers and weaker US data dominated news flow, according to GAM’s latest hedge fund performance review.
Global equities were down 6.0 per cent, as measured by the MSCI World index, while US Treasuries and investment-grade bonds were up 1.4 per cent, as measured by the Barclays US Aggregate Bond index.
“Global macro and trend following managers weathered January well, with positive aggregate performance,” says Anthony Lawler (pictured), portfolio manager at GAM. “The systematic and trend following traders had a strong January, positioning short energy, long core fixed income and long the US dollar against emerging market currencies.”
The environment was challenging for long-biased equity investors and for other active investment styles, continues Lawler, as risk assets broadly sold off in unison, rather than prices moving for idiosyncratic fundamental reasons.
“Equity long/short and event driven positions were challenging in January as equity markets sold off aggressively regardless of single-security fundamentals. Adding complexity for active managers, if you trimmed exposure during the sell-off, you then missed some of the bounce back, as equities recovered somewhat into month-end. Performance was largely determined by what level of total net market exposure the trader held, and whether the positions were biased toward defensive stocks, which did better than growth and value names.”
Hedge funds were down 2.8 per cent on average for the month, as measured by the HFRX Global Hedge Fund index, and at the strategy level only global macro produced positive performance at 0.9 per cent, as measured by the HFRX Macro/CTA index.
GAM sees opportunities in 2016 for global macro and trend strategies across currencies, rates and potentially commodities. Credit looks broadly attractive, say GAM, while equities could become a stock-picking challenge rather than a beta play.
On global macro opportunities, Lawler says that “the challenges in China and emerging markets continue to evolve. Conversely, the US looks set to muddle through with muted positive growth and low unemployment. This divergence in growth prospects is likely to require the PBoC and other central banks to ease monetary conditions, while the Fed is likely to stay the course of no further easing and even a small amount of slow and considered tightening is possible this year. These different expected policy and growth paths should create trading opportunities in currencies and bonds. In addition to this divergence, we see opportunities within Europe, in bonds for example, as easy monetary policy looks set to remain in place as employment levels and the consumer recover. In emerging market currencies and rates, we are seeing opportunities both long and short.”
Across equities and credit, the recent market moves lower have created opportunities in oversold positions but with ongoing technical risk. Lawler says: “We see increasing opportunities in credit across both investment grade and high yield. Certain energy and commodity-related names are arguably priced for default, which could create buying opportunities, but it is outside of these sectors where we are focusing our research today. We are waiting for the technical selling risk to subside and then expect to see some compelling risk/return trades for 2016 in credit compared to equities. Within equities we see stock picking opportunities as slowing global growth with low inflation creates challenges for highly leveraged companies versus expected winners with higher-quality balance sheets and stable earnings streams. We also see regional opportunities in places such as Europe, where unemployment continues to decline, credit conditions are improving and the domestic consumer is growing stronger.”
