Man FRM Early View - Jan 2017

February, 2017

January was a positive month for hedge fund returns across a number of strategies, with Equity Long-Short, Credit and Relative Value strategies generating positive performance. Returns from Macro managers, both discretionary and systematic were more mixed.

For Equity Long-Short managers, many reported more positive returns to alpha when compared to 2016, as managers with lower net exposure generated some of the better returns. Europe was noteworthy, perhaps reflecting the greater bounce from more disappointing returns last year, but returns from the U.S. and Asia were also positive in aggregate. The earnings season has been a fruitful source of alpha, with companies generally performing in line with managers’ expectations and share prices reacting as expected to good/bad news.

It was also a positive month for Statistical Arbitrage managers, with performance generated across major strategy types, and all main regions. Fundamental strategies seem to be among the best performing managers in January, a turnaround from 2016 when they were generally among the weakest strategies. Europe looks to have been a notable region for the strategy, with both Momentum and Valuation metrics contributing positively. Asia was perhaps the one region which didn’t recover its weakness at the end of last year – there are some suggestions that there may have been a deleveraging in the space that impacted the region. Technical managers were also able to generate positive returns in January, as were managers trading fast futures strategies.

In Event Arbitrage, deal spreads saw some widening. Policy and regulatory transitions of the new U.S. administration are in their earliest days post-inauguration, causing some uncertainty. For example, reports on renewed antitrust remedy challenges to the Rite Aid deal widened that spread, while the leadership transition at the Federal Trade Commission has not even commenced. Similarly, new legal challenges facing Qualcomm cast some uncertainty on the NXP deal, and the January court ruling against the Humana/Aetna deal (which faced an antitrust suit last summer) was again in the headlines. Deal flow month to date has been lighter versus the Q4 2016 pace at about $226bn (Bloomberg), including $70bn of “proposed” deals. Notable deals included J&J/Actelion ($30bn), Luxottica/Essilor ($24bn stock), Zodiak/Safran ($10bn cash), and VCA/Mars ($9bn cash).

Corporate Credit managers (Credit Long-Short and Credit Value) generally posted positive returns in January. It was another positive month for floating-rate financial preferreds on continuing demand for financial as well as floating-rate risk. Credit Value managers saw noteworthy returns from some legacy (media sector) as well as recently emerged post-reorg Equities, and benefited from continued progress in one of the large legacy bankruptcy situations (in the gaming sector). Performance for Credit Long-Short managers was driven by outright stressed/distressed Credit positions as well as capital structure arbitrage trades (in the energy sector).

Structured Credit managers were also positive overall on the month. Managers with a larger allocation to Collateral Loan Obligations (mostly 2.0 BBs) outperformed in January. Otherwise portfolio carry continued to be beneficial and managers saw mark-to-market gains across most sectors. Hedges, similar to the past few months, continued to be a drag on performance. Convertible Arbitrage managers, given the positive Equity and Credit market backdrop, were also generally positive in January.

Managed Futures managers delivered a negative return in January, driven by poor performance in FX, Commodities and Fixed Income partially offset by gains in Equities. In FX, managers entered the month net long USD and exhibited losses as the dollar sold off meaningfully against most other currencies. Short EUR, short GBP and short JPY were all detractors; long AUD and long NZD were contributors. Equities saw meaningful gains this month with positive returns in North America, Asia ex Japan and Europe being the biggest drivers. In terms of positioning, the biggest area of risk for Managed Futures managers at the moment is Equities where managers continue to be net long across the board, particularly so in North America and Europe. In FX, managers continue to be net long USD with short EUR, short GBP, short JPY and long AUD and long NZD being the main areas of positioning. In Rates, managers continue holding a net paid bias largely driven by paid positions in the U.S. and Australia and partially offset by received positions in Germany and the UK. In Commodities, managers are net long industrial metals, grains, livestock and softs and net short precious metals.

Discretionary Macro managers had a modest month in January relative to the positive months of Q4 – some managers with more robust FX exposure suffered losses as the USD reversed course against most Developed Market and Emerging Market pairs, although these moves were tempered somewhat towards the end of the month. Rates, on the other hand, maintained their upward trend, as Federal Reserve (‘Fed’) President Yellen delivered hawkish guidance in a mid-month speech suggesting the Fed stood ready to hike Rates at a faster pace than currently priced into the forward curve, and ECB’s President Draghi pointed to heightened inflation pressures while maintaining the current stance on quantitative easing. Managers remain long USD against the majors as FX remains the most concentrated risk exposure – this detracted significantly as the USD weakened steadily through the month. Some managers have reduced risk in FX on the year. Fixed Income exposure remains generally stable, with short U.S. Rates / steepening bias, and managers benefited from the U.S. rates sell-off following the hawkish Fed speech mid-month. Elsewhere, exposure in G4 Rates was mixed with paid UK rates contributing while longs in German/Italian Bonds detracted.