Global growth concerns increased in September, with the Fed holding a very dovish line, while several idiosyncratic market events, such as Volkswagen and Glencore, contributed to uncertainty and negative returns in markets.
The challenging month contributed to the third quarter being the worst quarter in performance terms for many risk asset markets since 2011. For the month, global equities as measured by the MSCI World index were down 3.6 per cent, while the US Dollar index and the Barclays US Aggregate Bond index were up 0.6 per cent and 0.7 per cent, respectively.
The correlated sell-off in risk assets proved challenging for active managers. Hedge fund performance was broadly negative, with the HFRX Global Hedge Fund index down 2.1 per cent for the month. Each of the four main HFRX hedge fund strategy indices were negative on the month.
The challenge for active managers was that the dispersion of single-security performance was low as the market traded down in unison, according to Anthony Lawler, portfolio manager at GAM. “Traders came into September with reduced exposures, but even so the correlated sell-off resulted in losses as markets did not reward fundamental relative value picking,” he says: “Fears about a global recession grew, resulting in risk asset prices falling almost in lock-step around the world. That is a tough environment for investors to produce outperformance.
Many traders continue to hold on to their views of a sustained recovery with positive growth rates, however muted growth proves to be, continues Lawler. “September was a painful month for investors who are long risk assets like equities, but we saw traders stick to their views and actually trim short exposures by month-end, meaning that hedge fund net exposure to equities was higher at the end of September. This shows that traders continue to believe that although global growth is moderating, they are not expecting a global recession. Equity traders continue to select what they consider to be over-sold single equities that would benefit from a slow cyclical recovery.”
One bright spot in September was trend following systematic managers, says Lawler. “Trend managers in aggregate are long bonds and short energy and even short some equities, all of which helped them produce a positive month of performance. September highlighted again why it is worth considering this type of exposure within a portfolio, as it is a strategy that can perform in a risk-off environment, where most other strategies and exposures struggle.”
Traders across strategies have by and large maintained their constructive views, but with reduced sizing, concluded Lawler. “In equities, gross exposure is slightly down, but traders have increased net exposure in Europe and beyond, as the view remains that growth will remain positive and consumer sentiment and employment trends look tentatively supportive. The positioning in global macro is smaller given market uncertainty, but remains long US dollar versus specific emerging markets and the euro, and then relative value trades in fixed income as the global recovery points to a dispersion in country growth rates. In credit, market liquidity has evaporated as we have previously discussed this year, but this too is opening up opportunities for patient capital to increase exposure at attractive levels as yields have spiked sharply, but expected default rates remain very low outside of energy and commodity credits. So the fourth quarter begins with some good entry points if the world muddles through current uncertainties and growth does not turn negative.”