Markets proved volatile across asset classes in February. The MSCI World index showed equities down over 6 per cent from their peak on 1 February through the trough on 11 February but by month-end had rallied back to almost flat.
Bonds had a positive month with the Barclays US Aggregate Bond index up 0.7 per cent. February’s volatility came partly as a result of softer economic data reinforcing investor concerns on the global growth outlook, according to Anthony Lawler (pictured), portfolio manager at GAM.
“Fears on China contagion and a broader global slowdown have manifested themselves in a number of forms over the past few months, including in new crude oil lows, emerging market currency sell-offs, credit spreads at historic wides and equity markets being generally weak. However, although macro data remains broadly patchy, a stabilisation in US data and commodity prices supported a relief rally into month-end.”
Against this highly volatile backdrop, hedge fund returns were mixed, with the HFRX Global Hedge Fund index down 0.3 per cent for the month. According to Lawler: “A noteable feature of current markets is that they can be described as moving ‘violently sideways’, which is very challenging for active investors. This price dynamic – ultimately flat but very bumpy along the way – tends to cause investors to cut risk near price lows and then not be in position when prices bounce back. This has us favouring patient, unleveraged strategies and certain systematic approaches, which we believe should hold-up through this choppiness.”
In February, across the main hedge fund strategies, trend following managers continued to lead performance, with the HFRX Macro/CTA index retuning 0.3 per cent.
Lawler says: “trend following systems were able to benefit from sustained moves in fixed income and natural gas, which were the lead performance contributors, while the choppiness exhibited in equities and crude oil resulted in muted performance from those trades. The discretionary macro traders found the environment more difficult to navigate than the trend following traders, with results slightly negative driven by discretionary trades including short US fixed income and long US dollar and inflation-linked bonds.”
Lawler notes that the ‘violently sideways’ choppy environment in February proved challenging for many equity hedge traders and other strategies. “In the equity hedge space, returns were modestly negative as managers that had de-risked in the sell-off in early February were then unable to participate meaningfully in the end-of-month relief rally. Similarly in the event space, although corporate activity increased during the month, managers were whipsawed by the reversal and ended the month flat.”
Lawler suggests that hedge fund managers are currently managing books with lower risk levels. “Managers have broadly responded to the elevated macro uncertainty and volatility by keeping risk levels limited by historical standards on a net exposure and gross exposure basis and are waiting for more certain macro data or more compelling prices.”
On the current opportunity set, Lawler concludes: “Given the elevated economic growth uncertainty and increasing, albeit low, chances of near term recession, equity assets by and large appear fully priced. We still find pockets of value in certain regions for equities. We also see value in emerging market debt and in global credit, where absolute yields and spreads should provide attractive compensation for the expected default outlook."
