April began with a relatively benign continuation of the prevailing upward trends in the dollar and most equity markets. Treasuries were initially bound within their recent range, and bunds maintained their inexorable rally. At the short end, US rates began the month in stable fashion, whilst German yields declined precipitously, to the benefit of consensus positioning. In commodity markets, spot WTI crude rose 25% in a straight line through the month (the Brent equivalent was up in excess of 20%). However, natural gas started the month with a flat-to-negative bias.
The closing days of the month saw dramatic, synchronous risk reversals across several regions and asset classes. This was triggered by an unwinding of the European growth trade in the face of continued intractability in the Greek situation. It was also due to data disappointments in the US, where key payroll data undershot expectations. The dollar sell-off also targeted consensus positioning amongst hedge funds. The export-dominated DAX dropped more than 4%, largely erasing April’s gains and resulting in the index notching up its first down month of the year.
In addition, overall eurozone growth showed indications of weakness. Metals executed an abrupt about-turn, arresting their slow decline and rallying in sync with oil. Only the grains maintained their bearish trends, finishing the month only marginally above recent multi-year lows.
Combination of wild market gyrations and a lack of synchronicity between fundamentals and market action proved challenging for many Discretionary Global Macro managers in April. For example, those who shorted US equities in response to the weakening US outlook were wrong-footed by a large cap rally. This saw the S&P500 reach a new high shortly before the end of the month. Those attempting to exploit the highly visible QE programme suffered substantial losses in the collapsing bund market.
Managers attempting to capitalise on slowing Chinese growth found themselves shorting equity markets that made double-digit gains on the month. Diversification added little value for this sector during April given the high correlation of popular trades within G10 instruments. The few winners typically gained from a focus on a few idiosyncratic ideas in less-trafficked markets.
What was true for macro managers proved doubly so for Systematic Macro and CTA managers. They typically target crowded trades and have less ability to search for the contrarian or off-piste ideas that mitigate losses in the discretionary space. A number of high-profile systematic managers suffered their worst-ever monthly returns on a risk-adjusted basis. This happened as trends in unrelated markets all reversed simultaneously, often in dramatic fashion. The oil and EUR rally took the largest toll on managers, though rates, bonds and equities also contributed to losses, leaving few hiding places.
As in previous months, results from Equity Market Neutral strategies depended heavily on the underlying strategy. Similarly to February, managers with a factor-timing element were typically wrong-footed by trend and momentum reversal, as were those focusing on quality, which dramatically underperformed. More contrarian managers, however, were correctly positioned, as value reversed their recent underperformance.
The broad sector averages for Long/Short Equity were positive in April, but with a wide dispersion of underlying results depending on strategy and positioning. This happened as macro-driven markets led to a poor month for bottom-up alpha generation. With the exception of the hitherto underperforming UK and increasingly idiosyncratic Greek market, European indices were lacklustre at best (e.g. the DAX suffered a dramatic sell-off). This presented a headwind for managers focussing on the region, as most take a constructive medium-term view and hence have net-long biases.
In the US, large-cap indices were moderately positive, though medium and in particular small caps were much weaker. This reflected both risk aversion in reaction to poor US data and declining market liquidity. At the sector level, Technology outperformed, though both the Healthcare and Consumer Discretionary sectors, where many managers are focussed, were weak.
With corporate activity remaining brisk in April, credit inching higher, and value names generally outperforming, Event Driven managers were afforded a number of opportunities to exploit. However, poor market liquidity and equity-index declines meant that the month was not without its challenges. Results were correspondingly mixed. Directional managers exposed to European situations suffered some mark-to-market drawdowns, while more spread-focussed strategies typically benefited from a supportive merger environment. On average, managers made small gains, but as with market risk managers, individual returns were dispersed across a wide range.
Despite the market ‘wobble’ and some corresponding losses in the hedge-fund space, most managers remain sanguine on both markets and their own strategies. Value-focussed managers in particular seem encouraged by opportunities thrown up by market turbulence. Most viewed April’s market action as a much-needed clear-out of crowded positioning that should open the way for more functional markets.
The back-up in bunds should relieve political pressure on the ECB, which no longer has to purchase bonds at negative yields. This should clear the way for a continued stimulative European environment. In addition, we continue to see an interesting pipeline of new launches, several of which are at the late stages of our due diligence process. We therefore have a cautiously positive outlook for our strategies over the balance of the year.
Head of Alternative Solutions Group
Alternative Solutions Group
Lombard Odier Investment Managers
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