External alternative multi management portfolios - July 2016

June was a volatile month. Europe traded poorly, US equities reached new highs as prospects of rate hikes faded and the Chinese RMB traded at its lowest level. The Brexits surprise on June 23rd exacerbated investment uncertainties. Markets jerked back and forth, with Eurostoxx ending the month at -6.5%, the UK at +4.39% and the US at +0.09%. VDAX finished the month at 24.8%, and Vstoxx at 26.1%. The iTraxx Crossover ended 57 bps wider on the month. Extreme sector rotations, especially in financials and insurance, had a negative impact on investments. Banks are down over -32% YTD in Europe, and Insurance indices are down 20% YTD. The European periphery was hit by risk aversion, with Greece ending at -15%, Italy at -9.5%, and Spain at -9.1%.

Post-Brexit, the US Dollar posted strong gains while the pound lost -10%, and the yen strengthened.  In the meantime, precious metals soared by +10%

In this volatile and negative environment The HFRX Global Hedge Fund EUR Index end slightly up at 0.05%  with the strongest gain coming from macro/CTA, EM and M&A strategies.

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.

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, 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 quest for yield and the zero-to-negative-rate environment have strongly supported the asset class and the ability to perform on the short side very challenging. We remain cautious on the strategy.