External alternative multi management portfolios MaY 2016

The global financial markets posted a mixed performance in April, with gains led by Energy, while both the Japanese Yen and the British Pound gained ground against the US Dollar.

Global equities posted mixed results, with gains in Europe countered by weakness in Asia, while gains across large- and small-cap indices were countered by weakness in Technology; reported earnings were also mixed, with weakness in Apple and Twitter offset by strength in Amazon.

Commodities, led by, among others, surges in Oil, Natural Gas, Aluminum, Platinum and Silver, posted sharp gains for the month, extending those of March. The Yen strengthened further against the $ as the Bank of Japan surprised markets with no new intervention, while the British Pound Sterling also gained against the US$ as investors re-priced Brexit risk on the increased likelihood of a ‘Brexin vote’ in June.

Hedge funds posted gains, with the HFRX Global Hedge Fund EUR Index gaining +27%, while the HFRX Market Directional Index gained +5.31% for the month.

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.  

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.

Systematic strategies have met challenging market conditions for the past 2 months. Trend followers have suffered from sharp reversals while statistical arbitrage funds have been negatively impacted by violent sector rotations on equity markets. Pattern recognition has been equally, if not more, impacted in this context. 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.

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.