External alternative multi management portfolios

OVERVIEW OF THE STRATEGIES CURRENTLY IMPLEMENTED FOR OUR EXTERNAL FUNDS OF HEDGE FUNDS PORTFOLIOS

The markets declined globally in December on a backdrop of the FED policy rate hike. Losses were widespread across all asset classes, led by energy, high-yield credit (impacted by the rise of treasury yields and the steepening of the yield curve) and European equities. US equities posted a more limited decline; energy and oilfield services lagged again this month. In the currency space, the USD fell against the EUR, the Swiss Franc and the Yen but rose against the Real, the Rouble and the Pound. In this context, the HFRX Global Index EUR declined by -1.44% and closed the year on a -4.38% loss.

Over the month, the main additions were to our UK-based rates specialist, to our Paris-based European equities manager and to our pattern-recognition quant holding. Positions were further built in our HK-based relative-value manager, in our US energy-focused fund, our European value managers and in our Norway-based healthcare holding. Positions in our ABS manager, our longstanding UK macro manager and in our US-based credit RV manager were trimmed.

Our performance in 2015 was supported by judicious rebalancings during the year. Credit was further trimmed in 2015 while we decreased weights in the more directional strategies in an attempt to reduce our aggregate net exposure. These adjustments also helped reduce the volatility in our book.

LONG SHORT EQUITY

We continue to be positive on the strategy but predominantly on neutral managers, who should indeed be able to perform on both the long and the short sides. Managers with a net short stance could also be useful additions, going forward.

We are mindful of the risks represented by exogenous shocks such as possible policy changes, more specifically so in the case of US healthcare or Chinese GDP slowdown.

Europe – on the back of the recent positive signs of economic growth – continues to look more compelling in terms of valuation and central bank actions.

GLOBAL MACRO

The markets are extremely difficult to navigate and exhibiting volatility spikes as policy adjustments are taking place. 2015 proved challenging for the strategy and we expect 2016 to be equally difficult. Nevertheless, important moves in the currency space could be a source of opportunities. We continue to be cautious in this space.

QUANT STRATEGIES

Some specific Systematic strategies have been powerful contributors in recent months on the back of trends across oil, rates and FX, among others. In the market-neutral quantitative arbitrage space, performances continue to be positive, albeit weaker than over the past couple of years. We are looking closely at some factors (value, momentum, growth), as this space has become more and more crowded through both alternative strategies and 130/30 long-only products.

We are looking actively at 4 managers that could bring diversification both at strategy and at portfolio level.

FIXED INCOME ARBITRAGE

The increasing activity of the Central Banks coupled with the decline of banks’ proprietary desks’ activity have been positive for the strategy to a degree in 2015.

EMERGING MARKETS

Emerging markets continue to be challenged:

• The transition towards a domestic-demand-driven economy is just getting started, especially in China. The recent turmoil proves that GDP growth remains fragile and that activity is exhibiting hiccups in this transitioning phase.
  • Of course, the situation differs greatly from country to country. In some cases, key rates oversight is very effective, while other countries that are highly dependent on foreign-currency funding sources are being stretched to the limit due to cash repatriation.
  • Our managers, benefiting from FX/rate dislocations, have been able to navigate rough market conditions.

RISK ARBITRAGE - EVENT DRIVEN

• While we believe that this strategy continues to make sense, its net long bias nevertheless puts it at risk in cases of strong market disruptions, as witnessed over August and September.
• M&A volume has hit its best year for deals by value since 2007 and spreads are more rewarding.

DISTRESSED

The distressed debt offer is still extremely limited for the time being. We do not see any immediate opportunities in this strategy. Nevertheless, the energy sector where massive issuance has taken place over the recent years may soon become an attractive pool of opportunities given the massive disruption in oil prices and its impact on these securities.

LONG SHORT CREDIT & HIGH YIELD

Although the US market has been more challenged than Europe, we remain confident that yield-chasing has not vanished, despite more uncertainty and the likelihood of an increase in the default rate, especially in the US.

• We are less active in this space, being more in favour of equity-related strategies. We prefer managers looking for idiosyncratic investments.