The ECB decided to take additional easing steps on December 3rd, but as we feared the measures did not meet market expectations. As a result, equity and bond markets sold off in Europe, with global contagion effects on risk assets. The EURUSD bounced back while commodities rose as a result of a falling USD. The latter was also related to a testimony by J Yellen expressing a gradual approach to Fed rate hikes.
Head of Research – Managed Account Platform
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The ECB decided to take additional easing steps on December 3rd, but as we feared the measures did not meet market expectations. As a result, equity and bond markets sold off in Europe, with global contagion effects on risk assets. The EURUSD bounced back while commodities rose as a result of a falling USD. The latter was also related to a testimony by J Yellen expressing a gradual approach to Fed rate hikes.
How does all of this impact hedge funds? We do not have comprehensive data yet on performances for the most recent days but we estimate that the impact from the modest ECB action is manageable. Over recent months, hedge funds have maintained a defensive stance in portfolios, with a market beta below 20 per cent since the late August market selloff.
With regards to the impact on hedge fund strategies, we estimate that Global Macro and in particular CTAs may have experienced higher losses relative to other strategies. Based on our proprietary data, we note that long term CTAs maintained short EURUSD, short commodities, long equities and long European bonds positions going into the ECB meeting. Global Macro managers had much less directional views on commodities and fixed income and had a reduced exposure to the EURUSD and European equities ahead of the ECB meeting. Finally, L/S Equity, L/S Credit and Event-Driven may have been moderately impacted. Some strategies reduced their net exposure going into the ECB meeting and Event-Driven funds, which are relatively exposed to the US, experienced softer moves than the European equity and credit markets.
Recent developments highlight the extent to which central banks have distorted markets. However, the tendency of markets to overshoot headlines implies that the negative reaction might have been excessive.
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