Global risk appetite remained steady heading into June, despite continued investor concerns over asset price valuation and political risks. The MSCI World was up +1.5% in May, led by Japanese indices. Meanwhile, sovereign bond yields remain stubbornly low and yield curves flattened, particularly in the U.S., raising questions over investors’ confidence on the pace of economic activity going forward. As a result, the Dollar index fell -2% in May, despite the fact that Fed Fund futures are fully pricing in a rate hike at the mid-June FOMC meeting.
Hedge fund performance has been disparate across strategies in May. Event Driven funds extended their winning streak (+0.7%), fueled by Merger Arbitrage which tends to perform well when bond yields fall. In parallel, Macro strategies underperformed (-1.3%), on the back of long positions on the USD and on hard commodities. The remaining hedge fund strategies (L/S Equity, CTA, Fixed Income Arbitrage) ended the month in the black, despite the poor showing of market neutral L/S equity funds (-1.3%).
In terms of positioning dynamics, it is striking to note the extent to which CTAs and Global Macro now differ with regards to Cable exposure. Since Theresa May has called a snap general election mid-April, CTAs have rushed to the exit, trimming net short positions on the GBP vs. USD to virtually zero. The strategy suffered losses in April, as the election announcement translated into trend reversals across UK assets. In parallel, Global Macro holds tight. The strategy even added to GBPUSD short positions going into the June 8th vote, at a time when opinion polls narrowed and expectations that the Tories would significantly reinforce their majority in the House of Commons vanished. Actually, a hung Parliament would likely translate into additional challenges in dealing with the EU; increasing the likelihood of a bad deal or no deal at all, which is bearing for the GBPUSD. While the recent performance of Macro funds is uninspiring, it is worth remembering that last year they were in a similar configuration. Holding tight on long USD positions which were not rewarding in H1, but were strong contributors to performance in H2-16. We currently maintain a neutral stance on the strategy and have a preference for diversified/multi asset managers.
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