The FOMC meeting on 17 September caused market jitters as market participants were probably expecting the Fed to clarify its policy intentions. The stance of the FOMC was merely interpreted as a delay in the rate hike, with a first move still likely to take place later this year as confirmed by J Yellen in a speech on 24 September.
Head of Research – Managed Account Platform
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The FOMC meeting on 17 September caused market jitters as market participants were probably expecting the Fed to clarify its policy intentions. The stance of the FOMC was merely interpreted as a delay in the rate hike, with a first move still likely to take place later this year as confirmed by J Yellen in a speech on 24 September.
Equities nosedived during the period under review, with the S&P 500 down 1.8 per cent and the Eurostoxx 50 down 4.1 per cent. Meanwhile, the USD appreciated against major currencies (except GBP and JPY), high yield credit spreads widened and sovereign bonds rallied.
Hedge funds were quite resilient amidst the market turmoil, with the Lyxor Hedge Fund Index down 0.4 per cent last week. The bond rally benefitted CTA and Macro managers as a result of their long positioning on the asset class. Meanwhile, short Euro against USD positions were also profitable for both strategies as the US Dollar rose against most currencies (except GBP and JPY). At the other end of the spectrum, Event-Driven funds underperformed due to their exposure to risk assets and were down 1.4 per cent last week. Special Situations funds, whose performance tends to be relatively more sensitive to equity volatility, underperformed.
The rebound in risk assets that we have been expecting since the recent sell off seems to be taking shape. Janet Yellen’s speech on 24 September reiterated her belief of a strong US economy and its ability to be resilient against any adverse developments in China. The market reacted positively, although it remains to be seen whether the rally in risk assets can be sustained. We think some catch up in risk assets is due following the recent losses that are disconnected from fundamentals to us. As a result we keep a slight overweight stance on Event-Driven to benefit from the expected improvement in risk appetite. Over the midterm however, it is likely that markets will remain volatile and this justifies our overweight stance on CTAs and L/S Equity funds with low directionality (variable bias, market neutral). Such strategies are attractive diversifiers and should help to navigate the unchartered waters of monetary policy normalisation.
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