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Weekly Brief: Market reversal should continue to fuel event-driven returns

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The fourth quarter of 2015 started on a strong footing, reversing the previous market downturn. During the first week of October, risk assets rallied, with the MSCI World up 5.8 per cent, following expectations that the Fed will postpone its first rate hike well into 2016. Implied equity volatility fell, the USD depreciated against major currencies, high yield spreads tightened, in particular in Europe, and commodities rallied. Finally, emerging markets received a breath of fresh air with the upturn in commodity prices.


Philippe Ferreira

Head of Research – Managed Account Platform

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The fourth quarter of 2015 started on a strong footing, reversing the previous market downturn. During the first week of October, risk assets rallied, with the MSCI World up 5.8 per cent, following expectations that the Fed will postpone its first rate hike well into 2016. Implied equity volatility fell, the USD depreciated against major currencies, high yield spreads tightened, in particular in Europe, and commodities rallied. Finally, emerging markets received a breath of fresh air with the upturn in commodity prices.

This market recovery is in line with our expectations, since we argued on several occasions that market concerns seemed overdone. Hedge funds enjoyed the tailwind, with the Lyxor Hedge Fund Index up 1.1 per cent during the first week of October. Event-Driven outperformed, up 2.2 per cent, and CTAs underperformed (-1.9 per cent), extrapolating in the hedge fund space the sharp market reversal. Beaten down managers during the sell-off rallied the most this week (see chart), with single fund weekly performances printing in the 5-7 per cent range in some cases. Our cautious stance on CTAs and our preference for Global Macro managers paid off, with the Lyxor Global Macro index up 2 per cent this week.

In the L/S Equity space, value managers partially recouped the severe losses experienced during the summer. But they remain far in the red on a year to date basis. The good news is that EM managers that were defensively positioned did continue to deliver positive returns this week. This is quite remarkable. The chart below highlights the fact that this manager is among the happy few having delivered positive returns both in August/ September and during the first week of October. Year to date, it is the best performer, up 18 per cent. Meanwhile, multi strategy and fixed income managers confirmed, if necessary, their ability to navigate different market configurations.

During the coming weeks, we expect that the recovery of Event-Driven managers is likely to continue. We also believe that the recent outperformance of Global Macro funds versus CTAs is likely to persist.

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