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L/S Equity strategies bear the brunt of the turmoil

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Following a sharp correction in risk assets for the second time this year, equity markets initiated a rebound by the end of October.

Initially caused by fears the U.S. economy was overheating, the market later focused on profit warnings during the earnings season, especially when companies reported cost pressures related to trade wars.

The selloff in October was difficult to navigate for hedge funds, but there were substantial divergences across strategies.

L/S Equity and Event-Driven strategies underperformed due to their elevated market beta. L/S Equity strategies also suffered due to the rotation in risk factors which saw growth/ momentum stocks underperforming value and low beta stocks. Within Event-Driven, Special Situations strategies were especially hurt but Merger Arbitrage was resilient.

On a positive note, L/S Credit, Merger Arbitrage and Market Neutral L/S strategies were highly resilient thanks to their cautious positioning and low market beta. Global Macro strategies were also resilient, in several cases thanks to short positioning on equities.

Going forward, we believe that market concerns are overdone and expect the market rebound to consolidate.

Over the medium term however, the growth deceleration in the U.S. coupled with monetary normalization suggest the volatility regime might remain elevated. Hence, low beta strategies such as Merger Arbitrage and Fixed Income Arbitrage remain highly attractive.

On top of that, we also favor flexible L/S Equity strategies that can adjust their net exposure dynamically.

Philippe Ferreira , November 2018

Article also available in : English | français

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