Weekly Brief: 2016 Outlook - Focus on Relative Value, Tactical and Macro

Philippe Ferreira

Head of Research - Managed Account Platform

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We enter 2016 with the same slow and fragile conditions as experienced at the end of 2015. Contradictory macro policies, such as tighter regulations vs. accommodative monetary policies, competitive easing and devaluations, has resulted in conflicting impacts on the markets. Those supporting volatility and dispersion should prevail - though unevenly across assets. The trading backdrop would remain similar to last year, with frequent rotations, hovering liquidity risk, erratic flows with rich valuations, and markets overshooting fundamental changes.

The first trading week of January came as a good illustration. In relation to this context, Hedge Funds are attractive relative to traditional assets, which are expected to deliver modest and riskier returns. This is leading us to favorable relative-value, tactical and macro styles, though with increased selectivity.

We currently prefer thematic and tactical Variable L/S Equity funds in Europe and Japan, and Market Neutral in the US, once the current rotation phase is over. We also favor Merger Arbitrage, as risks and spreads are higher, as well as carrying alpha potential. Multi-credit FI Arbitrage funds should benefit from the dislocation in credit segments. Finally, a higher volatility regime and themes in FX and global yields should support Global Macro funds, in particular the ones making room for relative value and tactical allocations.

By contrast, we would reduce allocation to the longest bias L/S Equity and Special Situations funds. The latter are offering modest return prospects – in tandem with a slow economic cycle – and with elevated risks. We are tactical and neutral CTAs until the formation of new exploitable trends emerges.

Last week, markets echoed last August’s CNY devaluation, resulting to a drop across the board. The bulk of the impact was felt in the longest bias strategies within L/S Equity and Event Driven funds, whilst other strategies displayed resilience. CTAs were boosted by their short commodity and long bond exposures.

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