HSBC’s hed

HSBC’s hedge fund research analysts provide their latest review of the factors that drive the different hedge fund strategies that they monitor.

Equity markets in June

There was a lack of earnings news in June, however, markets across the globe traded up. In Europe, this looked to be due to the potential for an interest rate cut in the region and the positive aspects on European companies of a weaker Euro.

However, the US continues to be in a tightening cycle with no consensus on when this may end. The mid-cap and small-cap segments of the US market outperformed large-cap stocks as consumer sentiment numbers were strong and companies are more insulated from the big picture macro stories. This encouraged investors to return to a space that had been heavily sold after the volatile events in equity markets in March to May.

Globally, company fundamentals remain fairly robust with few signs of distress, however, the macro economic picture suggests a global economy that, whilst not nearly in recession, is starting to show signs of slow down.

Bond markets in June

US fixed income markets traded within a tight range over the month. June began with economic numbers painting a fairly tame inflationary picture, causing fixed income markets in the US to fall.

However, towards month end, the durable goods orders report showed a decline (once the outsize aircraft orders were discounted) that also coincided with the oil price hitting USD 60 a barrel. This level acted as a psychological barrier for many and investors became concerned regarding the future economic picture, resulting in investors purchasing US Treasuries.

On the last day of June, the Fed hiked rates for the 9th time in succession. The language from the Fed was broadly unchanged and, whilst the policy remains “accommodative”, more rate hikes are on the agenda.

In Europe, markets became focused on a potential interest rate cut by the ECB. The month began with the ECB keeping rates on hold, however, the president Jean-Claude Trichet refused to expressly rule out a potential interest rate cut.  This was followed by the surprise move from the Swedish central bank; cutting rates 50bps. 

Later in the month, the minutes from the Bank of England’s most recent meeting showed two out of nine of the committee voted for an interest rate cut and, in the meantime, the economic news out of Europe was fairly weak. All the data pointed towards a soft demand backdrop for the region supporting the need for an interest rate cut. The only conflicting factor came from the recent weakness in the Euro supporting exporters in the region. There was a downward shift in European yield curves with a steepening at the short end as investors began to price in a potential interest rate cut.

In Japan, fixed income markets continued to rally; the curve flattened over the month as short term expectations remained unchanged, whilst the weak economic outlook for the country continues to favour investors purchasing bonds.

Individual hedge fund strategies

Equity long/short

Key drivers of performance:                  Equity Market Level – Neutral

                                                         Equity Market Rationality – Neutral

Equity long/short managers that took advantage of the market rally by increasing the gross and net exposure of the portfolio generated some strong returns in June.  European, Asian and emerging market managers continue to offer the most attractive returns in a less crowded space with underlying equity markets looking cheaper than the US. The HSBC outlook for both of the drivers of the strategy is neutral and the outlook for the strategy is also Neutral.

Summary

Strategy                                            View

Equity long/short                                Neutral

Equity market neutral                          Neutral

Statistical arbitrage                             Neutral/Positive

Convertible arbitrage                            Neutral

Merger arbitrage                                 Neutral

Fixed income arbitrage                        Neutral/Negative

Macro                                                Neutral

Managed futures                                 Neutral

High yield/Distressed                          Neutral/Negative

Event driven/Multi-strategy                   Neutral 

Background notes: Strategy ratings represent HSBC Republic Investments Limited’s assessment of the outlooks for the different hedge fund strategies relative to each other.