Risk assets extended their recovery in May, with global equities experiencing a strong rebound for the second month in a row. High Yield credit and EM sovereign also rallied, as the spread of the Coronavirus in developed countries eased, lockdown measures were relaxed, and economic activity initiated its rebound. In Europe, a € 500bn Recovery Fund financed by European Commission bond issuance has been proposed to help fuel the recovery. This has translated into an outperformance of European equities in May.
In the space of alternatives, hedge funds were up +0.4% in May, with Global Macro and L/S Credit strategies outperforming (+2.4% and +1.2% respectively as of May 26). Within Global Macro, Discretionary and Emerging Market (“EM”) sub strategies outperformed vs. Systematic strategies. They partially captured the trend reversal in risk assets in Q2-to-date, having maintained or even increased risk in portfolios during the selloff. Their overall stance remains nonetheless defensive. On a negative note, CTAs underperformed in May due to their defensive positioning which helped protect performance during the selloff in February/ March. CTAs were down -1.5% in May as the rise in bond yields and the steepening of yield curves across developed markets was a headwind. CTA strategies trading commodities underperformed due to short positions on energy contracts, however, the sharp rebound in energy prices (Brent +38% in May) had positive reverberations across a broad range of asset classes ranging from HY credit/ EM sovereigns to EM FX and Global Macro strategies which were the main beneficiaries from it.
EM Macro sub strategies rebounded in May (+4.3%) in a context where EM sovereign benchmarks were up 6.3% (EMBI Global Diversified). Oil producers (Mexico, Russia, Saudi Arabia, Qatar) rallied among large issuers. EM Macro were also helped by long positions on quasi sovereigns, receiver positions in local rate markets and short positions on EMFX. Finally, Discretionary strategies (+2.3%) were also supported by the cross-asset rally in EM assets (equities, bonds, and FX) but curve flattening trades detracted from performance in May. Our stance on Global Macro stays somewhat defensive (Neutral). We are not revising it as we fear the oil-induced rally might be short lived due to disruptions in global transportation lasting longer than expected.