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Weekly Brief: Hedge funds down in Q3 amidst volatile markets

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Market conditions remain challenging, particularly in the US where the S&P 500 fell 3 per cent during the period under review. Part of this movement was related to adverse developments in the health care sector which suffered a severe drawdown after Hillary Clinton hinted that she would reform the sector and introduce price curbs if elected next year. This follows the controversial decision by a pharma company to significantly raise the price of decade-old drugs.


Philippe Ferreira

Head of Research – Managed Account Platform

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Market conditions remain challenging, particularly in the US where the S&P 500 fell 3 per cent during the period under review. Part of this movement was related to adverse developments in the health care sector which suffered a severe drawdown after Hillary Clinton hinted that she would reform the sector and introduce price curbs if elected next year. This follows the controversial decision by a pharma company to significantly raise the price of decade-old drugs.

In this environment, hedge fund performance was negative, with significant differences existing across strategies. CTAs and Macro managers continued to outperform as a result of their long positions on Fixed Income. L/S Equity managers were quite resilient, though US managers suffered in comparison to their European and EM counterparts. Finally, Event-Driven funds were down as a result of their exposure to the health care sector.

Overall, the September performance of the Lyxor Hedge Fund Index (HFI) is -1.0 per cent, while the MSCI World was down 2.1 per cent and HY cash spreads in Europe and the US widened 70bps approximately. For the full Q3, the HFI is down 3.6 per cent, while the S&P suffered its most severe drawdown (-8.2 per cent) since the third quarter of 2011.

Going forward, we continue to recommend CTA and Macro strategies. The September establishment survey data signaled an easing in the pace of nonfarm payrolls (+142k in September vs August, below expectations) which continued to support Fixed Income. As a result, the rally in CTAs is ongoing. We are also overweight variable biased and market neutral L/S Equity funds which have delivered positive returns lately. Finally, we do not recommend a decrease in the exposure to Event-Driven after the drawdown. Health care names have partly recovered since the hit a few days ago and the sector is among the few ones that have not experienced a downward revision in near term earnings expectations. The sector is immune to China’s growth deceleration and to the recent slump in commodity prices.

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