Market headlines were focused on the greenback last week, and how its current strength could impact the Fed’s future path of monetary policy. The dollar has been on a surge for some time now, underpinned by robust US economic data, but this was particularly prevalent following strong non-farm payroll numbers, published last Friday.
Head of Research – Managed Account Platform
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Market headlines were focused on the greenback last week, and how its current strength could impact the Fed’s future path of monetary policy. The dollar has been on a surge for some time now, underpinned by robust US economic data, but this was particularly prevalent following strong non-farm payroll numbers, published last Friday.
The Dollar Index hitting a 12-year high versus the Euro is a real concern for major exporters, triggering a downside move in US equity markets. In this context, hedge funds as a whole suffered on their long equity exposure: this was in spite of some managers having turned more cautious since the start of the year, decreasing their beta exposure and limiting their losses.
However, some gains were posted on other asset classes. A stronger dollar means that global liquidity is drying up, bringing further pressure to commodity and emerging markets. CTA funds generally benefited from the decrease in oil prices over the week, being short commodities. L/S Equity managers benefited as well since most funds are short on the energy sector. Concerns over emerging markets have yet to materialize by meaningful positions on more fragile countries, but some funds managed to post gains on short EM equity and currency positions.
A normalizing Fed policy also exacerbates the downside of the euro and the Japanese yen, which were already driven down by their own domestic QE policies. While the euro is approaching parity against the dollar, most macro and systematic managers still believe the common currency has room to further decrease against the dollar. This was a strong driver of performance over the week.
In a higher volatility environment, we tend to favour managers with a more tactical bias. The diversification profile of hedge funds is emphasised by the performance of Lyxor’s Hedge Fund Index, up 2.1% since the start of the year, while the S&P 500 Index is negative.
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