July brought dispersion across geographies and asset classes. As fears about a Grexit receded, European equities and fixed income rallied, according to GAM’s latest Hedge Funds Industry Update.
While other developed equity markets generally followed suit, China sold off steeply on retail selling pressure and fears of highly leveraged local retail investors further reducing their holdings. Returns varied across asset classes, global equities, investment grade credit and government bonds in the positive versus significant weakness among commodities. The US dollar index closed up 1.9 per cent for the month at the expense of the euro, the yen and many emerging market currencies.
Hedge fund performance mirrored this dispersion; global macro managers performed well while their event driven peers generally lost ground. Relative value and equity hedge strategies delivered small positive and negative performances, respectively. The HFRX Global Hedge Fund index ended the month flat with the strategy level indices varying from -1.7 per cent for the HFRX Event Driven index to 2.3 per cent for the HFRX Macro/CTA index.
Macro traders were rewarded for the resumption of global themes in July, according to Lawler (pictured), portfolio manager at GAM. “The conviction exposures in global macro and trend following remain long US dollar, long European equities and to a lesser extent, long Japanese equities, short energy and relative value trades in fixed income. Although traders came into July with slightly lower exposures given the Greek uncertainty and seasonally lighter volumes, the core themes played out well and monthly performance contribution came from across those main thematic trades.”
Conversely, event driven traders had a challenging month caused by energy prices selling off and certain company-specific earnings misses, says Lawler. “WTI oil sold off over 20 per cent, marking its worst monthly move since 2008. This oil price weakness hit energy event driven equities and credits hard and, combined with disappointing earnings calls from a few names, resulted in the toughest month of the year to-date for event driven performance. We continue to see plentiful opportunities and high levels of corporate activity providing traders can sidestep the energy pain and contagion.”
The outlook remains positive but with caveats around policy, geopolitics and market liquidity concludes Lawler: “The divergence in global policy continues to create trading opportunities as the Fed looks to tighten while Europe, Japan, China and other regions and countries’ central banks continue to run very accommodative policies. This is a helpful backdrop for global macro and relative value traders, while equity hedge traders can also benefit if they have a global remit. Risks should remain front of mind, given that surprises in policy or geopolitics could result in sudden reversals, while markets continue to be both seasonally and structurally less liquid.”
