On 16-17 September the Fed will meet to decide whether or not to hike rates for the first time since 2006. The set of economic projections will reveal critical information about the Fed thinking. The market expects a dovish stance. The probability of a rate hike, based on Fed fund futures, is as low as 28 per cent. The probability is close to 40 per cent for the end-October meeting and reaches 59 per cent for December.
Head of Research – Managed Account Platform
Click here to download the full report.
On 16-17 September the Fed will meet to decide whether or not to hike rates for the first time since 2006. The set of economic projections will reveal critical information about the Fed thinking. The market expects a dovish stance. The probability of a rate hike, based on Fed fund futures, is as low as 28 per cent. The probability is close to 40 per cent for the end-October meeting and reaches 59 per cent for December. September is thus not priced in and would disturb markets if it takes place. From our perspective, this would drag equities lower and trigger a bear flattening of the yield curve. We believe the Fed will refrain from hiking this week and instead will only provide an indication about the path of future interest rate hikes. Our scenario is thus supportive for risk assets in the short term.
Based on the dovish market expectations, US equities moved higher last week and equity volatility eased. Cash credit spreads tightened in the US, both investment grade and credit. This supported hedge funds, with the Lyxor Hedge Fund Index up 0.6 per cent during the period under review. The USD appreciated against major currencies, supporting CTAs which outperformed other strategies (+1.4 per cent). CTAs were also fuelled by long European bonds positions, as the ECB expressed a dovish stance at its last monetary policy meeting. Meanwhile, Event-Driven strategies have shown signs of recovery for a second week in a row, bolstered by the improved risk sentiment. L/S Equity strategies also did well, though market neutral strategies, on which we are overweight, underperformed long biased ones.
Whatever the Fed's decision, hedge funds are expected to provide protection in portfolios. In light of expectations that the Fed will refrain in the short-term, we are eager to take some directional risks and have upgraded Event-Driven as a result. We remain cautious in the medium term as the Fed will at some point start to hike and shrink the size of its portfolio. The volatility regime will be higher and investors will continue to seek alternatives to diversify their portfolio. Inflows into alternative UCITS reached a record in July (EUR 7.7bn). This is just the beginning or a long term re-weighting of hedge funds in institutional portfolios.
Click here to download the full report
