Implications for hedge funds of the renewed quest for yields

The recent turnaround in the global monetary stance, led by the Fed and more recently by the ECB, has further fueled the fixed income and credit market rally. 10-year bond yields in Germany are back to levels last seen in 2016, when deflation was a serious threat to economic activity. Meanwhile, High Yield credit spreads in Euro and U.S. Dollar tightened significantly in Q1, to levels close to 400bps from 540bps at the turn of the year. In other words, renewed monetary accommodation is translating into a significant compression of risk premia across asset classes. As an investment theme, the quest for yield is back and likely to stay for some time.

In this context, most hedge fund strategies experienced positive returns so far in Q1. According to available benchmarks such as the HFRI Liquid alternative UCITs index and our peer groups, L/S Credit, L/S Equity and Global Macro strategies outperformed. In particular, EM-focused Global Macro and Special Situation strategies benefitted the most from the renewed dovish stance of the Fed. Concurrently, CTAs underperformed and stand in negative territory year-to-date due to their short equity positioning at the start of the year. But such losses were partially offset by gains in their fixed income and currency buckets.

Going forward, we maintain a preference for Event-Driven and Fixed-Income (Arbitrage) strategies compared to L/S Equity and within the Global Macro space we still have a preference for EM-focused strategies.

Finally, Our stance on CTAs stays neutral, but we are observing green shoots of recovery. In March, the strategy is on track to deliver its best monthly performance since August 2018.