OVERVIEW OF THE STRATEGIES CURRENTLY IMPLEMENTED FOR OUR EXTERNAL FUNDS OF HEDGE FUNDS PORTFOLIOS

January 2016 will go down in history as the worst start to the year since 1928. The poor showings on the equity markets were driven mainly by renewed concerns on the Chinese economic situation.

This disastrous start to the year was also marked by heightened volatility in the oil price, which hit the equity markets especially hard. Volatility was driven by an almost constant news flow, including Saudi Arabia's decision to break off diplomatic relations with Iran, the record output in Iraq and heavy inventories in the US. Global equities, led by biotech, energy, financials, healthcare, China, Italy and Germany, posted sharp declines.

Turmoil on the financial markets and concerns over emerging economies, led by China, could lead the ECB, in Mario Draghi's words, to "review and possibly reconsider" its policy at its next meeting, on 10 March. His statements triggered a partialrally at the very end of the month. As expected, the Federal Reserve left its key rates unchanged. The USD gained against the CNY and the GBP, and declined vs. the JPY. In this environment, some strategies closed the month on a gain (Macro, CTA) while equity strategies posted sharp losses. The HFRX Global Hedge Fund Index posted a -2.89% decline for the month.

Over the month, an initial investment was made in a quantitative credit RV fund specialized in technical index/single name CDS dislocations. Further capital was deployed in our pattern recognition specialist while we terminated our investment in a European ABS specialist. Investment in two Special Situations (Event-driven) managers were trimmed. We remain extremely cautious in this environment and are looking to reduce our residual net long exposure and therefore our sensitivity to markets.


LONG SHORT EQUITY

We continue to be positive on the strategy but predominantly on neutral managers, who should indeed be able to perform on both the long and the short sides. Managers with a net short stance could also be useful additions, going forward.

We are mindful of the risks represented by exogenous shocks such as possible policy changes, more specifically so in the case of US healthcare or Chinese GDP slowdown.

Europe – on the back of the recent positive signs of economic growth – continues to look more compelling in terms of valuation and central bank actions.

GLOBAL MACRO

The markets are extremely difficult to navigate and exhibiting volatility spikes as policy adjustments are taking place. 2015 proved challenging for the strategy and we expect 2016 to be equally difficult. Nevertheless, important moves in the currency space could be a source of opportunities. We continue to be cautious in this space.

QUANT STRATEGIES

Some specific Systematic strategies have been powerful contributors in recent months on the back of trends across oil, rates and FX, among others. In the market-neutral quantitative arbitrage space, performances continue to be positive, albeit weaker than over the past couple of years. We are looking closely at some factors (value, momentum, growth), as this space has become more and more crowded through both alternative strategies and 130/30 long-only products.

We are looking actively at 4 managers that could bring diversification both at strategy and at portfolio level.

FIXED INCOME ARBITRAGE

The increasing activity of the Central Banks coupled with the decline of banks’ proprietary desks’ activity have been positive for the strategy to a degree in 2015.

EMERGING MARKETS

Emerging markets continue to be challenged:

  • The transition towards a domestic-demand-driven economy is just getting started, especially in China. The recent turmoil proves that GDP growth remains fragile and that activity is exhibiting hiccups in this transitioning phase. Besides, we see the lack of clarity at central policy level as another reason to be extremely cautious in China.
    • Of course, the situation differs greatly from country to country. In some cases, key rates oversight is very effective, while other countries that are highly dependent on foreign-currency funding sources are being stretched to the limit due to cash repatriation.
    • Our managers, benefiting from FX/rate dislocations, have been able to navigate rough market conditions.

RISK ARBITRAGE - EVENT DRIVEN

  • 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, as witnessed over August and September.
  • M&A volume has hit its best year for deals by value since 2007 and spreads are more rewarding.

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.

LONG SHORT CREDIT & HIGH YIELD

Although the US market has been more challenged than Europe, we remain confident that yield-chasing has not vanished, despite more uncertainty and the likelihood of an increase in the default rate, especially in the US.

  • Given the dislocation in this space, we are contemplating possible new investments there.

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