Despite a benign start to the month and low market volumes, risk assets sold off notably in the final days of July as investors reduced risk in equities, credit and bonds, according to GAM.
Those reversals resulted in broadly negative performance for July with the MSCI World index down 1.6 per cent, US high yield credit down 1.6 per cent (as measured by the IBOXX HY index) and the Barclays US Aggregate Bond index down 0.3 per cent, all in US dollar terms.
Hedge funds as a group were negative performers for the month with global macro being the positive outlier.
The HFRX Global Hedge Fund index was down 0.9 per cent and the HFRX strategy indices for event driven, relative value and equity hedge strategies were down 1.0 per cent, 1.1 per cent and 1.6 per cent, respectively.
The HFRX Macro/CTA index was up 0.5 per cent for July.
"Generally, active managers were positioned with a view that global central bank policy would remain supportive. As a result their positions were broadly hurt by the risk-off reversals into the month end," says Anthony Lawler, portfolio manager at GAM. "Our base case view is that rates will remain low and central banks will continue to be supportive. Managers have kept their directional and tactical views constant after the reversals in July, but in some strategies such as equity hedge exposures have been pared back going into the seasonally quiet market volume month of August."
Global macro managers posted their third consecutively positive month as the strong US dollar view was rewarded.
"Global macro traders were rewarded for their conviction, while some managers continue to wait to position for any larger moves in currencies or rates later this year. We see some positive indicators for macro trading, such as dispersion of global growth rates and policy paths, but aside from the US dollar, we are not yet seeing significant positioning shifts come through via widely supported trades," says Lawler.
GAM continues to see attractive opportunities in event driven equity strategies, while being cautious on the liquidity risk in certain credits.
"In our view, event driven equity strategies continue to face tailwinds," says Lawler. "The volume of merger deals, refinancings and activist activity remains robust and we expect this to continue. We are more cautious on the credit side of the capital structure and are generally not looking to increase our long credit exposure. This is due to current pricing levels and the risk of price ‘gappiness’ if investors were to decide to further reduce high yield credit holdings. Even though our base case is for interest rates to stay low for longer, we are not buying high yield credit beta at current levels. Rather we favour the risk/reward profile of nimble long/short managers and the specialist asset-backed credit managers in the current environment."
