The Wilshire Liquid Alternative IndexSM, which provides a representative baseline for how the broad liquid alternative investment category performs, returned -0.24 per cent in June, and -0.56 per cent for the second quarter in 2018.
Both returns underperformed the -0.19 per cent monthly return and 0.16 per cent quarterly return of the HFRX Global Hedge Fund Index. The Wilshire Liquid Alternative Index family is a joint offering between Wilshire Funds Management, the global investment management business unit of Wilshire Associates Incorporated, and Wilshire Analytics, creator of the Wilshire 5000 Total Market Index.
“Volatility continued in the second quarter, as investors assessed the impacts of rising geopolitical risks and the changing interest rate environment,” says Jason Schwarz (pictured), President of Wilshire Funds Management and Wilshire Analytics. “Despite heightened tensions, fundamentals remained positive, which bolstered both equity and credit returns.”
The Wilshire Liquid Alternative Multi-Strategy IndexSM, which includes both single and multi-manager funds, returned -0.23 per cent in June, and -0.01 per cent for the second quarter in 2018.
The Wilshire Liquid Alternative Global Macro IndexSM, which includes systematic, discretionary, commodity and currency funds, ended the month down -0.09 per cent, underperforming the 0.12 per cent return of the HFRX Macro/CTA Index. The Index finished the second quarter negatively, returning -1.94 per cent, underperforming the HFRX Macro/CTA Index’s quarterly return of -0.22 per cent. For the quarter, systematic, discretionary, and currency strategies contributed negatively to the Index.
These relatively muted returns veiled a somewhat eventful quarter in terms of geopolitical developments. Gains from the long dollar trade helped to offset losses sustained elsewhere due to increased geopolitical uncertainty. In late May, political uncertainty in Italy caused the BTP-bund spread to widen in a multiple standard deviation event. Discretionary macro managers betting against the populist rhetoric in Italy were especially vulnerable to this move. Further, CTAs suffered as the move triggered a quick selloff in equities. Much of the dispersion between discretionary macro managers can be explained by their risk posturing with regard to emerging markets. Managers expressing directional long exposure to emerging market countries generally underperformed compared to those who were more neutral or short.
The Wilshire Liquid Alternative Relative Value IndexSM, which includes credit, convertible arbitrage and volatility funds, finished the month down 0.22 per cent, underperforming the 0.39 per cent return of the HFRX Relative Value Arbitrage Index. The second quarter’s -0.72 per cent performance underperformed the HFRX counterpart’s 1.20 per cent return. Volatility and Convertible Arbitrage strategies made slightly positive contributions to the index return on the quarter.
These managers have benefited from a long-awaited return to a higher, and more normal, volatility environment. Multi-strategy and credit managers detracted from the quarterly return, as higher yielding credit held up well, given the waves of trade war rhetoric coming from the Trump administration and continued populist-driven threats to the EU. The majority of investment grade credit managers underperformed due to higher interest rate risk. Structured credit exposure was positive in the quarter, driven by positive coupon income.
The Wilshire Liquid Alternative Equity Hedge IndexSM, ended June down 0.55 per cent and the second quarter down 0.12 per cent, outperforming the HFRX Equity Hedge Index’s -0.67 per cent June return and underperforming the -0.92 per cent quarterly return. Long-biased equity strategies underperformed in June and quarter-end; however, there were significant divergences in performance across managers. Value-oriented strategies underperformed throughout the quarter as their long positions underperformed growth-oriented investments in Information Technology and Consumer Discretionary sectors. Moreover, domestic strategies outperformed global strategies as emerging markets were challenged each month of the quarter. Certain put/call option strategies contributed positively, benefiting from rising equity markets and income sourced from option writing. Market neutral strategies detracted from the index.
The Wilshire Liquid Alternative Event Driven IndexSM, which includes credit, merger arbitrage and special situations funds, ended June and the second quarter up 0.50 per cent and 1.15 per cent, respectively, outperforming the 0.46 per cent and 0.33 per cent monthly and quarterly returns of the HFRX Event Driven, respectively. Despite a volatile monthly performance in May from geopolitical concerns, merger arbitrage strategies were positive as a group for the quarter, particularly in June, as a notable media merger gained court approval. Credit managers outperformed as credit spreads remained tight amid favourable fundamentals.
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