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Research

Half-year review and the way forward

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Hedge funds were up 3.8% in H1. CTAs, EM Focused Global Macro and Special Situation strategies outperformed, while Merger Arbitrage and Market Neutral L/S Equity underperformed.

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Hedge funds were up 3.8% in H1. CTAs, EM Focused Global Macro and Special Situation strategies outperformed, while Merger Arbitrage and Market Neutral L/S Equity underperformed. CTAs extended their winning streak in June on the back of the strong positive performance of equity and bond markets. They outperformed other Hedge Fund strategies for the fourth month in a row, bringing the H1 performance to +8.0%. 

Going forward, we are concerned about potential trend reversals in fixed income. Bond yields have reached very low levels in particular in Europe. The bleak macro picture does not suggest bond yields should rise materially and sustainably in the short to medium term. But CTAs have an accumulated net long positions on Fixed Income and even a modest repricing in bond yields would hurt their performance. As such, we maintain a Neutral stance on CTAs and argue that recent performance could be seen as a reason to take some profits and rebalance progressively to Systematic Global Macro strategies which hold net short position on bonds which would hedge against a potential rise in bond yields. 

Overall, we remain focused on “carry” strategies such as EM focused Global Macro and L/S Credit. But trade wars have reduced visibility and we upgraded Market Neutral L/S Equity at the expense of Long Biased L/S Equity Funds. Finally, we maintain Merger Arbitrage at Overweight. The combination of stronger CEO confidence, lower financing costs, and record levels of private equity dry powder may lead to a supportive environment. M&A volumes rebounded, and deal spreads have widened since early May, providing opportunities to deploy capital at attractive entry points.