External alternative multi management portfolios - June 2016

The global financial markets posted a mixed performance for May as investors factored in the US Federal Reserve’s near-term interest-rate increases, as well as a close outcome of the upcoming British referendum on EU Membership ('Brexit vote') across the equity, fixed income, commodity and currency markets. The US equity markets – led by Technology, Small Caps, Biotech, Energy and Healthcare – gained; European gains led by Germany & France were partially countered by declines in Italy while Asian equities were also mixed.

The US Dollar posted strong gains in anticipation of higher US rates in the near term, advancing against the Euro, the Japanese Yen, the Swiss Franc, the Brazilian Real and the Mexican Peso. US short-term treasury rates also rose as the yield curve flattened, with yields on longer-dated maturities posting a modest decline.

Commodities were also mixed, with the gains in Oil, Sugar and Soybeans countered by a decline in Metals, including Gold, Platinum and Silver.

The HFRX Global Hedge Fund EUR Index gained 0.35% over the month, with the strongest gain coming from the event-driven bucket.

Long short equity

We continue to be positive on the strategy despite the recent disruptive market conditions. We have selectively trimmed risk in response to the difficulties experienced by some of our more fundamentals-driven managers. The current risk-on/risk-off environment continues to be challenging for these managers. We maintain a positive bias towards funds mindful of, and which proactively manage, their factor risk and style exposures.  

Global Macro

The markets are extremely difficult to navigate and exhibit volatility spikes as policy adjustments are taking place. 2015 proved challenging for the strategy and 2016 continues to unroll on an identical note, with sharp whipsawing reversals on a large array of asset classes such as commodities, equities and FX. We continue to be cautious in this area.

Quant strategies

Systematic trend-following strategies are benefiting again from the strengthening of some trends, especially on the bond markets. Statistical arbitrage funds are still impacted by some deleveraging on the equity markets. We are closely monitoring factors such as value, momentum and growth, as this space has become more and more crowded by both alternative strategies and 130/30 long-only products.

Fixed Income Arbitrage

The increasing activity of the Central Banks, the on-going asset collection by trend-following, coupled with the decline of banks’ proprietary desk activity, are positive for our 2016 strategy. Our managers are benefiting from Europe, US and Japan dislocations, as well as significant other dislocations between the credit indices and their constituents.

Emerging markets

Emerging markets, while continuing to be very volatile, offer some very specific opportunities:

• The transition towards a domestic-demand-driven economy is just getting started, especially in China. The recent turmoil proves that GDP growth remains fragile over this transitioning phase. Besides, we see the lack of clarity at central policy level as another reason to be extremely cautious regarding China.
  • The South American bond markets have rallied strongly in 2016: Venezuelan sovereign bonds have been supported by the oil market, while Brazilian corporate credit and Argentine sovereign bonds have benefited on more idiosyncratic political grounds.
  • Our managers, benefiting from FX/rate dislocations, have been able to navigate rough market conditions.

• While we believe that this strategy continues to make sense, its net long bias nevertheless puts it at risk in cases of strong market disruptions. The risk/reward proves out to be less interesting now than over the recent years.
• M&A volume has hit its best year for deals by value since 2007 and spreads are more rewarding. Widening spreads in recent times could offer a very lucrative ground for the strategy going forward.

Distressed

The distressed debt offer is still extremely limited for the time being. We do not see any immediate opportunities in this strategy. Nevertheless, the energy sector where massive issuance has taken place over the recent years may soon become an attractive pool of opportunities given the massive disruption in oil prices and its impact on these securities.

Although the US market has been more challenging than Europe, the level of yield has become attractive on an absolute basis despite more uncertainty and the likelihood of an increase in the default rate, especially in the US.