Against a choppy market backdrop which saw the MSCI World index close down 0.2 per cent for the first quarter of 2016, the HFRX Global Hedge Fund index remains negative for the year, although it was up 1.2 per cent for March.
Anthony Lawler (pictured), portfolio manager at GAM says: “The volatility year-to-date has proved challenging for active managers who were generally hurt in January and February before recovering with some gains in March. Many had trimmed exposures in January and early February before the rebound and were unable to benefit in size from the subsequent rally. This type of environment leads to whipsawing of many active discretionary managers and can favour more systematic approaches.”
Macro and CTA funds delivered positive performance on the quarter following a solid start, as reflected by HFRX Macro/CTA index returns.
Lawler says: “Systematic trend followers benefited from long positions in fixed income and the US dollar and shorts in commodities and equities in January and into February. As markets reversed to a more risk-on tone, these traders responded by reducing risk in some of those trades, remaining long fixed income and shifting to long positions in equity indices. These moves mitigated losses in March and drove positive systematic performance for the quarter. Conversely, discretionary macro traders started the year poorly with most down in January and early February, before clawing back performance in March through some emerging market long exposures, long equities and rates trading and reducing or closing positioning in long inflation, short US duration, and long US dollar."
The volatility in the quarter proved challenging for managers in the equity hedge and event driven space, says Lawler. “Crowded value and event trades were a source of pain as investors across the board trimmed exposures early in the quarter, regardless of the fundamental merits. This led to outsized losses in fundamentally researched equities and credit. However, this trend somewhat reversed in March as managers that had gradually re-engaged in their highest conviction trades were rewarded as performance in the month was a function of risk-taking levels and buyers returning to some of these over-sold names. These event and equity managers continue to like the long-term expected value in their holdings, but they face ongoing market technicals, or market selling, risk.”
GAM continues to see market choppiness as a risk while select opportunities are available to investors.
Lawler says: “The price path for equities over the quarter, where the market ultimately moved violently sideways, is very challenging for active traders. We expect the equity markets to continue to be challenging even though certain value plays look fundamentally attractive. We see opportunity in areas such as specific oversold equities in a few geographies; some credit sectors that look compelling in a low growth and stable default rate environment with supportive central banks; and in relative value trading in currencies and rates as currency battles could continue to drive trading opportunities.”
