July was a strong month for equities with both the MSCI World index and the S&P 500 index up over five per cent for the month in US dollar terms, according to GAM’s latest hedge fund performance update.
Investment grade and high yield credit in the US and Europe rallied with notably large investor flows into US high yield. The US dollar reversed with the DXY index showing the dollar down 2.0 per cent against the index basket of currencies for the month.
Hedge fund performance for July was in aggregate positive but delivered a mixed bag of results at the underlying strategy level. Equity-based strategies performed well, but with less convincing results from non-equity managers. The HFRX indices for equity hedge and for event driven produced performance of 2.6 per cent and 1.7 per cent respectively, but the HFRX index for global macro/CTA was down 0.5 per cent and the relative value index closed flat.
Anthony Lawler (pictured), portfolio manager at GAM, says: "Equity hedge managers, both long-biased and market-neutral, generally produced solid returns as we continued to see dispersion in equities against a supportive backdrop for the asset class. In event driven, managers fared well not only because of the positive drift in equity prices, but also because corporate activity levels continued to pick-up in the form of share buy-backs, asset sales and acquisition activity. Our outlook for both equity hedge and event driven strategies remains positive for the second half of the year."
“Conversely, July was choppy and challenging for global macro and CTA managers,” says Lawler. “Right now many of these managers have a lot of risk in currencies with a large position that is long the US dollar against several currencies. Therefore, looking at the path of the US dollar index – the DXY – perhaps best indicates their performance. The DXY started July at 83.1 and rallied during July to 84.6, but after Bernanke's taper clarification comments, the dollar sold off with the index ending July at 81.5. Many traders and systems that were long the US dollar struggled with the reversal into US dollar weakness as it occurred across the board – regardless of whether the managers’ short currency against the dollar was the Japanese yen, the euro or emerging market currencies.”
Lawler adds that hedge fund managers remain invested and have conviction positions going into the seasonally quieter month of August: "The opportunity set for equity hedge and event driven is positive and these managers have kept high risk levels going into August. Relative value managers continue to find attractive opportunities as dispersion within and across asset classes remains high. In global macro, managers remain optimistic, even after the reversals in July, and they maintain their views such as being bullish on the US dollar, bullish on the Nikkei, and bearish on emerging markets, albeit at moderately reduced risk levels."