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Hedge fund performance positive halfway through a choppy year

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June was a choppy month with reversals and sell-offs across most asset classes as investors digested Mario Draghi’s comments on expecting high volatility for bonds followed in the second half of the month by the risk escalation in Greece. 

Negative monthly returns were seen in global equities, bonds, investment grade and high yield credit, the US dollar and hedge funds.
For the first half of the year US dollar strength was notable, with the US Dollar index up 5.8 per cent. Global equities were also positive but with dispersion in performance led by Japan, China and Europe over the US. Sovereign bonds and investment grade credits were broadly down while high yield remains slightly positive year-to-date. Hedge funds are up year-to-date; the HFRX Global Hedge Fund index has gained 1.3 per cent with positive contributions coming from equity hedge, event driven and relative value strategies. Global macro performance for the half year was negative after a challenging June.
Equity hedge managers are outperforming other hedge fund strategies partly because of the dispersion in equities, says Anthony Lawler, portfolio manager at GAM. “The market has rewarded security selection over beta this year. Equity hedge managers have fared well with their increased conviction in Europe and Japan which remain in place, while at the sector level managers are in aggregate positive on the economic outlook as evidenced by the overweighting of cyclicals. At the macro level, the uncertainty in Greece and Europe has driven equity managers to pare back gross exposures across their portfolios – a trend that could continue for the remainder of the summer.”   
We believe the outlook is positive for hedge funds through the second half of 2015, short-term uncertainties remain an important consideration, adds Lawler. “Most traders have pared back risk exposures rather than betting on a specific outcome in Greece. This situation together with concerns in China around retail borrowing against equities and the increase in bond volatility all contribute to a reduction in risk exposure coming into July. But the consensus view is that coming out of the summer the outlook for dispersion and growth is attractive.”
Global policy dispersion going into the second half of the year points to a positive environment for active managers, says Lawler: “Our expectation is that the second half of 2015 will continue to be rich in opportunities for active managers. We expect to see the Fed tighten while the European Central Bank, the Bank of Japan and the People’s Bank of China continue their respective easy monetary policies. This should drive continued movements in currencies and should provide opportunities to trade relative value within and across asset classes globally. The risk to this positive outlook remains policy or political surprises, such as the one in Greece.”

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