November was a positive month for Equity Long-Short and CTA strategies and mixed to negative for Credit, Discretionary Macro and Relative Value. The best performing factors in markets were momentum (both at the security level and asset class level) and short volatility (particularly around the drop back in implied volatility through the second half of the month).
In Equity Long-Short, the best performing region was Europe, where managers continued to build on a positive year for alpha. As noted above, the key driver here was single stock momentum, and the best performing managers in November were those who have had positive performance over the last few months. We saw a similar phenomenon in Europe in periods such as August 2013-February 2014 and June 2015-December 2015. Both of these periods ended with a momentum reversal which saw losses across many European Equity Long-Short managers. Asian and US managers had mixed performance on the month.
In macro markets, global sovereign yields and the USD trended lower on the month, with dovish central bank rhetoric from the Fed (Federal Reserve) and the ECB (European Central Bank) amid concerns about a weak inflation outlook. This has kept a cap on yields in the near term, and had a flattening effect on the US yield curve, with the 2s10s US Treasury curve flattening 20bp to the lowest levels since 2007. Despite this, the market is all but fully pricing for a December Fed hike (96% probability). Emerging Market currencies continue to be supported by ample global liquidity conditions and low real rates in the US, as well as global growth momentum, propelling the Emerging Market FX index to YTD gains of nearly 5%.
Overall Discretionary Macro managers suffered losses in November, as many managers continue to hold shorts in Developed Market rates. FX trading remains one of the more tactical asset classes for Global Macro, although several hold thematic shorts in KRW as a geopolitical risk hedge, and also shorts in JPY on the expectation of continued accommodation from Prime Minister Abe. Longs in gold as a risk hedge position also benefited on the month. Oil prices broke higher on healthy global oil demand and OPEC maintaining production targets steady through 2018. Global Macro managers have diverged on crude forecasts. Managers continue to employ a portfolio tilt towards Relative Value constructs, as global spread trading and cross-market trading has provided a potential opportunity set in the context of monetary policy divergence.
November was also a challenging month for Event Driven strategies. The highlight, albeit negative, was Time Warner/AT&T. News flow began to circulate in the first few days of the month that the Department of Justice had antitrust concerns on Time Warner, despite this being a vertical merger, causing the spread to widen significantly and the pain for managers holding this position to be relatively severe. Later in the month the Department of Justice filed a suit to block the deal, though that was pretty much baked into the price already. Managers have generally trimmed their position in the deal slightly, but the general consensus is that this deal could still get done. Sky and NXP were also in the news, but the net P&L impact of this deal was smaller. Overall merger spreads widened a bit throughout the month.
With 2017 coming to a close, M&A (merger and acquisitions) activity is accelerating. Deal activity reached USD 390bn in November including USD 205bn of proposed deals (Bloomberg). Transactions worth USD 10bn+ increased over the past month, driven by: (1) increasing confidence in global economic conditions; and (2) the looming threat from super-corporations. Special situations outperformed Merger Arbitrage in November. And, European managers generally saw positive alpha from their equity and credit softer catalyst situations.
For CTAs, November was a positive month. As in the last two months, equity has been the main driver and has generated the bulk of the gains. The performance has been driven by Asia (including Japan) and North America, while Europe excl. UK has been the only detractor. Net exposures remain long across regions.
Fixed income has contributed positively, while commodities have been flat and FX has detracted marginally. The performance has generally been driven by short positions in US Treasuries and long positions in Japanese, French and Italian Government Bonds. Short positions in Canadian and long positions in German Government Bonds, however, have detracted this month, while commodities have been flat. The gains in Energy (Oil and Fuels) have been offset by losses in agriculturals and livestock. Interestingly there has been quite a bit of differentiation in commodity performance this month. In line with last month, FX is the only asset class that has detracted on a month to date basis.
It was another month of underperformance for corporate credit relative to equities. Corporate credit spreads widened through mid-month among heavy outflows from US high yield bond funds before recouping most of the losses by month-end as outflows subsided. The loan market was also somewhat soft as issuance was robust, driven by re-pricing and refinancing activity while loan funds saw outflows as the yield curve flattened.
There was a fair amount of dispersion in US high yield industry returns as the energy (driven by the rally in crude oil) and utility sectors outperformed, while telecom, healthcare and retail sectors were weak.
Corporate Credit manager returns had a negative bias in November given the market backdrop, with mixed performance of reorganization equities, credit longs/shorts and stub trades. Puerto Rico municipal debt saw further markdowns in November along with the debt of monoline insurers as investors continue to evaluate the full extent of the economic impact from the hurricane. Structured Credit managers outperformed in the month as spreads grinded tighter across most securitized products sectors
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)
|- Fundamental strategies, which carry the most cross-sectional momentum, were negatively impacted in the final week of the month …||- The pain following antitrust news flow was relatively severe for managers holding Time Warner/AT&T…||+ Overall merger spreads widened a bit throughout the month …|
|<> With 2017 coming to a close, M&A (merger and acquisitions) activity is accelerating.||+ Progress on tax reforms positively impacted the Altaba stub trade.||- November was challenging for Merger Arbitrage strategies, especially during the first week of the month.|
Equity Long-Short (ELS)
|+ November was another robust month for most equity markets globally but there was more dispersion than usual ...||<> The outperformance of the Tech sector this year has led to a large amount of crowding …||<> In terms of markets, the US and Japan were up around +3%, Asia ex-Japan returned -0.6% while European markets were down between -1.5% to -3% …|
|<> Value had a positive month along with Growth, though Value still lags significantly on a YTD basis.||+ In November, the results of several Retail sector companies were positive surprises.||+ The best performing region was Europe, where managers continued to build on a positive year for alpha.|
|+ Structured Credit managers outperformed in the month as spreads grinded tighter across most securitized products sectors …||<> US leveraged credit markets ended November broadly flat (US HY +0.0%, Loans +0.2%; JPM) as US tax reform progress helped erase losses early in the month …||+ November US HY new issuance of USD 28bn was in line with YTD monthly averages …|
|- Corporate Credit manager returns had a negative bias in November given the market backdrop.||<> Stub trade performance was again mixed widened significantly and utility sectors outperformed.||<> Flat performance for US HY concealed the underlying dispersion of sector returns.|
|<> Commodities has been a challenging sector for Managed Futures managers throughout the year …||<> The strong USD seen in September and October reversed in November …||+ The probability of a December Fed hike rose steadily throughout the month, to over 95% …|
|+ Fixed income continues to be an area of thematic focus and in risk allocation, and several managers shifted more bullish on risk assets.||- Discretionary Macro managers suffered losses in November, as many managers continue to hold shorts in Developed Market rates.||- Global sovereign yields and the USD trended lower on the month, with dovish central bank rhetoric from the Fed (Federal Reserve) and the ECB (European Central Bank).|
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.