Hedge funds consolidated their gains from the first half of 2014 in the third quarter, despite equity markets producing a mixed performance over the quarter, according to Deutsche Asset & Wealth Management Q4 Hedge Fund Outlook.
Discretionary macro and trend-following strategies in particular gained as the anticipation of extraordinary monetary policy by the ECB impacted bond yields and exchange rates.
Equities, as proxied by the MSCI World Index, gave back performance over the period. The quarter began in July with a sell-off in risk assets due to a cocktail of a very strong US GDP print, higher yields, a slew of weaker earnings, the Argentinean default and concerns over Banco Espirito Santo, all of which weighed on sentiment.
However the primary focal point for investors during the quarter was the action that the ECB would take in an effort to both combat deflation in Euro land and enable an effective transmission mechanism for banks to lend to the region’s faltering economy. Asset class movements during August and September largely reflected these expectations and deliverance of some form of quantitative easing by the ECB and even lower interest rates. Government bond yields found new historical lows and the Euro depreciated sharply against the USD.
In credit markets a temporary pull back in high yield heralded further volatility as the spread weakness witnessed from late June to early August, after a period of recovery, re-occurred in September. Meanwhile commodity prices continued to be weak. In particular the price of crude fell sharply, despite heightened geopolitical risk during the summer, perhaps an indication of investor fears over deflation.