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Weekly Brief: Heterogeneous participation in the risk rally

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Last week, markets focused on welcoming encouraging October economic releases, factoring possible non-US central banks actions, digesting a more hawkish Fed and jumping into the rally.

Philippe Ferreira

Head of Research – Managed Account Platform

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There was a lot of economic data and EPS releases to digest which, on balance, conveyed a reassuring take on the mild global recovery. These, along with the pricing of further easing in Europe and China (and possibly in Japan), the re-risking of smart money and better technicals, altogether fueled a risk rally. It filled most of the gap dug since August.

Signs that the pulse of the rally might be exhausting are emerging. Indeed, valuations are back to pre-sell-off level, short covering is leaving equities with lesser protection and most of the smart money’s re-risking has been achieved.

While hedge funds proved resilient during the sell-off episode, they gave back some of their advance to traditional assets during the rally. Their overall performance last week reflected heterogeneous strategy returns.

Primary victims of the sell-off, the wheel turned in favor of Event Driven and the longest bias L/S Equity. Both strategies continued to regain the lost ground, especially in their sectors of predilection: Technology, Communication and Consumers.

In contrast, CTAs underperformed, hit by their long bonds exposure. US short term rates bore the brunt of the FOMC hawkish tone. Global Macro were flat, their losses in rates were offset by gains in their long USD crosses. Emerging and Asian funds lagged, also under the pressure of the Fed and the dollar.

As the trading pulse in risky assets gradually erodes and with remaining uncertainties as regards the Fed’s path, hedge funds are offering a balanced market exposure.

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