FRM Viewpoint - December 2017

  • The HFRX Global Hedge Fund Index rose +0.73% in December, increasing its full year return to +5.99% for 2017.
  • The passage of the US tax reform bill posed as a positive catalyst for risk assets and for the USD, particularly in the first half of the month.
  • Deal activity was strong in December. Approximately USD 500bn of deals were announced, including USD 56bn of proposed transactions.

Download PDF Monthly Performance Driver Summary

Summary of performance drivers by strategy

Key: + Positive factors and/or drivers <> Neutral factors and/or drivers - Negative factors and/or drivers
  Alternative risk premia Trade examples1 Environmental factors

Relative Value (RV)

 + The HFRI Event Driven Index was up +1.07% and HFRI Merger Arbitrage Index was up +0.35% in December …  + A telecommunications company was a positive contributor for several managers on the back of multiple bidders for an acquisition target’s assets and reduced risk perception …  + Approximately USD 500bn of deals were announced, including USD 56bn of proposed transactions …
 + Soft Catalyst/Special Situations generally outperformed as they were able to capture significant alpha and/or beta in equity and credit markets.  <> Relative Value strategies were also positive. Holding Companies and Stub trades both contributed positively, while Share Classes were generally flat on the month.  - Predicting deal pipeline has proven to be a challenging exercise.

Equity Long-Short (ELS)

 <> The momentum reversal that started in late November lost steam in December …  + The collapse of a South African retail chain at the start of December was a big contributor for a number of managers …  <> The Russell 2000 was a notable outlier in terms of performance in December after it fell -0.6% against the S&P 500’s +1.0% gain …
 + Value and Growth factors both ended the month with positive performance, but Value outperformed Growth by almost 100bps.  - The crowding into Growth/Momentum names has also not yet dissipated.  <> The US Q4 earnings season will begin in earnest in mid-January.


 + Corporate Credit managers generally posted gains across most sub-strategies in December …  <> US levered credit markets posted modest income-driven gains (HY and loans each up +0.4%; JPM) in December …  - In Corporate Credit, we are neutral on Credit Long-Short and negative on Distressed Credit strategies …
 - Credit risk transfer deals which saw meaningful demand-led spread compression.  + Credit managers benefitted from good performance of reorg. and public equities.  - 2017 net HY new issue activity (USD 120bn) was the lowest since 2011.

Global Macro

 <> Potential repatriation flows on the back of corporate tax reform will be a focus for macro managers active in developed markets FX …  <> USD weakness extended into December, particularly against EM FX which witnessed its second largest monthly gain of 2017 …  <> Recent divergence in rates and monetary policy guidance has caused macro managers to skew risk allocations toward fixed income …
 + Discretionary macro managers had positive performance overall in December.  - Extreme year end funding pressures and USD scarcity pushed short-dated cross currency basis swaps to extremely negative spread levels.  <> Expectations of higher rates came alongside the third consecutive December rate hike from the Fed.

The above summary is based on FRM’s opinions on performance drivers across the hedge fund industry and is not representative of the investments made by FRM. 1. The herein mentioned examples are intended as illustrations of typical investment consideration and/or strategy implementation. It should not be construed as indicative of potential performance of the fund or strategy or any investment made by the fund. It does not constitute a recommendation or investment advice or solicitation to buy or sell any particular securities and should not be considered as any investment advice or research of any kind. There can be no guarantees that similar opportunities will be available in the future or that any opportunities identified will provide similar results..


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