By: Philippe Ferreira, Jean-Baptiste Berthon, & Eloise Girard-Desbois
Recent patterns in financial markets, such as the flattening of sovereign curves, reflect deflationary expectations. They tend to characterize late-cycle movements ahead of a recession and a monetary easing cycle. This is inconsistent with the ongoing recovery post Covid-19, which should see a certain degree of monetary tightening in 2022. A partial explanation of the decline in bond yields lies in downward revisions to fiscal stimulus expectations in the U.S., as the current administration is constrained by its tight majority in the Congress.
Recent price action across asset classes was tricky to maneuver for alternative strategies. CTAs underperformed in June, down -1.7% according to Lyxor UCITS Peer groups, due to trend reversals in currency and fixed income markets. As bond yields fell, their positioning on U.S. Treasuries shifted to the long side and they covered USD shorts. Global Macro, L/S Equity and Event-Driven ended the month in negative territory, but in moderate proportions (-0.2%), while L/S Credit outperformed (+0.2%). Dispersion was elevated within L/S Equity and Macro, with some strategies down -5 / -10%, and dispersion was low within Event-Driven and L/S Credit strategies.
For the full quarter and in H1-2021, the script was different. Alternative strategies with a higher equity market beta outperformed as equities rallied. We estimate alternative strategies were up +1.8% in Q2, while the MSCI World was up +7.6% and the Barclays Global Aggregate was up +1%. On a year-to-date basis, equity related strategies (L/S Equity, Event-Driven) outperformed those predominantly invested in fixed income (L/S Credit, Global Macro).
Going forward, we expect healthy returns from Event-Driven and aligned the stance of Merger Arbitrage with Special Situations at O/W. The record pace of corporate activity, attractive deal spreads and diversification features of the strategy should continue to be supportive. After the rally in risk assets in H1, strategies with low beta/ low volatility features, such as Merger Arbitrage, are more attractive. We maintain the O/W stance on CTAs. The positioning remains balanced, with a long equity bias to capture the economic rebound. The slightly long exposure to fixed income is not expected to be costly if the tapering of asset purchases from the Fed causes a rise in bond yields. Finally, CTAs provide exposure to commodities which remain attractive at this stage of the business cycle.
Originally Published on July 8, 2021
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