Editor’s Letter – October 2014

Issue 98

HAMLIN LOVELL

For the first time since 2008 CTAs and managed futures funds may be the best performers so far in 2014, with some macro funds also rebounding. The Newedge CTA index was up around 6% year to 23 October, with some CTAs doing much better. Man Group’s AHL Diversified was up 19.48% and ISAM Systematic up 28.89%, to 17 October. CTAs have been able to pick up strong trends in many of the markets they trade. Numerous commodities, including cotton, corn and copper have made multi-year lows, while coffee and cocoa have leapt higher this year. Each of these markets has unique weather-related drivers. If weather in the US Midwest has helped the corn harvest, droughts in Brazil have hurt coffee trees. These few examples illustrate a bigger picture of shifting market dynamics. Instead of marching in lockstep to the risk off/risk on tune, markets are ploughing their own furrows in response to good old-fashioned supply and demand fundamentals. Lower pairwise correlations amongst markets are good news for CTAs and macro, with Brevan Howard Macro up 4.5% in September. Elsewhere in macro, Pharo GAIA was up 30.97% and Pharo Trading up 20.40% year to 10 October.

On the regulatory front, US restrictions on tax inversions have probably contributed to deal breaks such as Shire – and cut valuations that contained an inversion premium – causing some losses for merger, event and activist funds. However, there is a wide spread of performance here, with plenty of merger arbitrage funds still up for the year. Amongst activists Marcato was down 11.38%, while Pershing Square was still up 26.56% to 10 October, and Bill Ackman has just listed a vehicle on the Amsterdam stock exchange. This listing is one of 22 alternative fund IPOs over the past year that have raised $12.6 billion, according to Dexion. Listed alternatives on the London and Amsterdam stock exchanges now add up to $73 billion, just over 2% of global hedge fund industry assets of around $3 trillion.

Elsewhere in regulations, we hear that Solvency II proposes a risk weighting of 39% for private equity and venture capital, but sticks with 49% for most hedge funds. This may marginally increase the incentive for less liquid hedge funds in strategies such as direct lending or regulatory capital to use private equity fund structures. The rules may also encourage liquid hedge funds to use UCITS – and Lyxor thinks that hedge funds in managed accounts may attract lower risk weights. However, it seems strange that vehicles with a five or 10-year life – that might be impossible to monetize during a crisis – should be ascribed a lower risk weighting than hedge funds, which in the case of macro and CTAs have often delivered “crisis alpha”.