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

Global financial markets ended February on a mixed note. The possibility of a Brexit as well as the US primaries had a negative impact on investor sentiment; Financial, Tech and Biotech securities were impacted the most. Nevertheless the largest losses were pared by month end in some sectors. As evidence of investors’ defiance, gold posted a second consecutive monthly increase while oil traded in a volatile range. The GBP declined against all major currencies. US treasury yields fell sharply during the month but recovered by the end of February. Hedge Funds closed the month down with the core losses coming from directional strategies. However, CTAs were up, with the HFRX Macro Diversified CTA Index gaining +2.75%.


LONG SHORT EQUITY

We continue to be positive on the strategy despite the recent disruptive market conditions experienced over the month. The past 2 months have seen a significant sector reversal particularly in the commodity and financial sectors, as well as strong dislocation within some sectors such as technology and healthcare. Momentum and quality-style managers suffered, while value managers enjoyed a strong rebound with their strategy.

Opportunities exist in all market conditions for our managers to perform, which is why we run a substantially diversified bucket.

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 exhibit volatility spikes as policy adjustments are taking place. 2015 proved challenging for the strategy and 2016 starts on an identical note. We continue to be cautious in this area.

QUANT STRATEGIES

Some specific Systematic strategies such as trend following have continued to be powerful contributors in recent months on the back of trends in equities, oil, rates and FX, amongst others. In the area of market-neutral quantitative arbitrage, recent market conditions have proved to be more disruptive. 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.

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. Our managers are extending gains into 2016, benefiting from both Europe and US dislocations, as well as significant dislocations between the credit indices and their constituents.

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. Besides, we see the lack of clarity at central policy level as another reason to be extremely cautious in China.
    • 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. Widening spreads in recent times could offer a very lucrative ground for the strategy going forward.

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 challenging than Europe, the level of yield has become attractive on an absolute basis despite more uncertainty and the likelihood of an increase in the default rate, especially in the US

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