Alternative strategies saw exciting developments in Q1, in a context where equities and bonds experienced opposite fates. We estimate alternative strategies were up +1.2% quarter-to-date (as of March 19th), while the MSCI World was up 5% and the Barclays Global Aggregate was down -2.6%. The reverberations of rising bond yields on other asset classes were a hurdle for some strategies such as Global Macro and L/S Credit.
Overall, L/S Equity strategies navigated rotations quite well (+1.7%) and CTAs outperformed (+2.5%) despite the trend reversal in fixed income. Event-Driven also managed to deliver healthy returns (+2.3%), with Special Situations outperforming Merger Arbitrage. The latter reassured investors, demonstrating its ability to discriminate between SPACs as an overabundance of SPAC IPOs and excess leverage triggered a correction in February without concrete implications on Merger Arbitrage performance.
Going forward, we have adjusted our views to the changing market environment. We assume 10-year Treasury yields will continue their ascent towards 2%-2.5% in the next twelve months on the back of ambitious fiscal stimulus plans and solid economic prospects. In this context, carry strategies, on which we were constructive until now, are less appealing. We downgraded L/S Credit and EM Global Macro to Neutral. Historically, High Yield credit has proved resilient to a selloff at the long end of the Treasury curve. But L/S Credit is negatively impacted by rising implied volatility in rates, which is a source of risk as market concerns over inflation grow. All in all, we don’t expect the conditions are met for L/S Credit to outperform. With regards to EM Macro, the underlying asset class is more directly impacted by rising Treasury yields and the appreciation of the USD vs. local currencies, which has led several central banks to hike policy rates lately (Brazil, Russia, Turkey). With regards to the remaining strategies, we remain Overweight Event-Driven and Neutral L/S Equity (with Directional L/S at Overweight and Market Neutral L/S at Underweight). We upgraded CTAs to Overweight in February and stick to that view. Overall, we have a slight preference for Event-Driven vs. L/S Equity and now prefer CTAs to Global Macro strategies.