Markets remained unstable during the month of November, with broad market indices evolving nervously post-press releases and new data points. US and Asia equities finished the month positive, with investors apparently appeased by the encouraging ongoing negotiations between the US administration and the Chinese government regarding tariffs. European equities continued to lag US equities, overloaded with political events. Brexit seems tougher than ever to wrap up, Italy is still negotiating with the EU and France’s economy has once again been disturbed by massive street demonstrations. Defensive sectors tended to outperform the market. In Europe, telecom was the best-performing sector while energy lagged the market, returning negative high single digits.
Sovereign issues from the US and the Eurozone benefited from a flight to quality. Mid-to-long-term maturities declined by, on average, 5 to 10bp, the only exception being gilts, where Brexit concerns took yields on maturities over 20 years 0.20% higher.
The commodity performance was a mixed bag during the month, apart from oil, which continued its downward trend. The WTI declined by 22% over the period.

The HFRX Global Hedge Fund EUR was down -0.90% during the month of November.

 

Long short equity

November was a tough month for long short equity strategies. After a bruising October, managers continued to delever their strategies, selling longs and covering shorts. This type of environment is challenging for managers because their short book will usually outperform their longs. Market-neutral and short-bias strategies lagged net long strategies, which benefited from the late-month equity market rally. While European-focused funds seem rather bearish at the moment, US equity funds seem to offer the best investment opportunities in terms of themes and visibility.

Global Macro

 On average, global macro strategies were negative. Sentiment continues to be an important market driver, leading to significant asset trend reversals and to a significant level of performance dispersion. Some managers posted interesting performances, profiting from trends in oil, equities and currencies. Global macro strategies tend to offer great opportunities in rising volatility environments, in periods of limited central bank intervention and when rates are rising.

Quant strategies

CTAs with shorter-term models continued to make money because they benefited from trends on equities, currencies and commodities. Strategies with a longer-term model have difficulties coping with sharp reversing trends. Statistical arbitrage strategies, suffering from a general deleveraging environment, adapted their underperforming models to current market conditions by running lower risk while increasing their research efforts.

Fixed Income Arbitrage

Managers’ returns were slightly negative in November due to a significant change in market dynamics. The spiking level of volatility on interest rates should benefit the strategy, which offers an interesting opportunity as its positive convexity bias will benefit from a more volatile environment. Since the beginning of the year, all managers in this space have delivered strong risk-adjusted returns (the best from managers with the widest scope), while being positively exposed to volatility. The US, Japan, Canada and Australia were the best contributors. Europe was more difficult in terms of opportunities, apart from specific areas such as asset swap spread trading.

Emerging markets

Since the beginning of September, discretionary fund managers with an Emerging Market focus have been, on average, positive. The macro environment situation has improved in countries like Turkey and Brazil, with investors seeing their long positions in currencies and bonds appreciate in value. Nevertheless, EM remains a tough environment, with a lot of uncertainty surrounding it. Investors remain concerned about the medium-to-long-term impacts of trade tensions between the US and its major commercial partners to the region. Rising costs of US-denominated debt issuance is also a cause for concern. While the timing for the resolution of most of these problems is unknown, the dislocations created by Donald Trump’s policies will, at one stage, become opportunities. 

 

Risk arbitrage - Event-driven

Activity in merger arbitrage deals was healthy in 2018. Spreads for less complex deals have compressed, remaining quite immune to the equity market turmoil. This has allowed fund managers to navigate the market quite smoothly since September. Most have well-diversified exposures in terms of deals because they are wary about spreads widening significantly should equity-market risk aversion continue. Merger arbitrage strategies had a very good month of November, benefiting from the closure of high-profile deals. United Technologies’ offer to acquire Rockwell Collins received the final approval required from China’s State Administration for Market Regulation. The Chinese regulator also approved Disney’s offer to buy Twenty-First Century Fox’s entertainment assets. The approval of these 2 deals led to the tightening of other deals in a similar situation. 

Distressed

We believe that we are in the late stages of the credit cycle, with default rates and spreads near historical lows. After US junk debt-spreads-to-Treasuries reached another all-time low in October, the situation reversed in November, when credit risk premiums started to react to the current economic uncertainties. We are closely monitoring distressed managers, due to the potential of high expected returns, while remaining broadly on the sidelines. We see a growing number of US hedge funds specializing in distressed assets starting to raise money in anticipation of the next economic downturn.

Long short credit &High yield

After several months of outflows and marginal spread widening, the US high spread went back to its tightest spread level, supporting our negative view on the strategy.

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