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Which hedge funds strategy amid rising uncertainties?

Despite massive headwinds from trade tensions, Brexit deadlock and the manufacturing recession, asset prices have been incredibly buoyant so far this year. But as we head into Q4 2019, the sky starts to fill with clouds. We believe the balance of risks is highly asymmetric and turn more risk adverse, with hedge funds as a possible way to navigate the uncertainty looming on the horizon.

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Despite massive headwinds from trade tensions, Brexit deadlock and the manufacturing recession, asset prices have been incredibly buoyant so far this year. But as we head into Q4 2019, the sky starts to fill with clouds. We believe the balance of risks is highly asymmetric and turn more risk adverse, with hedge funds as a possible way to navigate the uncertainty looming on the horizon.

Equities could deliver the highest returns since 2013, with the MSCI World up 18% year-to-date as of early September. Concurrently, global bond benchmarks are on track to deliver their best year since 2000, with the Barclays Global Aggregate above 9% year-to-date.

In this context, hedge funds are also posting robust returns. The Lyxor Global Alternative UCITS Peer Group was flat in August, leaving year-to-date returns close to +5% in USD terms. Performance in recent months was led by CTAs, which delivered impressive returns in August and YTD (+3.8% and 16.2% respectively).

But as we are head into Q4 2019, we believe the balance of risks is highly asymmetric and turn more risk adverse. Hedge funds might help navigating the ongoing uncertainties. Merger Arbitrage and Market Neutral L/S are attractive due to their low market beta despite their underperformance so far this year. We also reiterate our O/W stance on L/S Credit and EM Global Macro, as a stance in favor of carry strategies in a low bond yield environment.

Meanwhile, we are more defensive on high beta strategies such as Directional L/S Equity (U/W) and Special Situations (N), which are likely to feel the brunt of the equity market volatility.

Philippe Ferreira , September 30

Article also available in : English EN | français FR

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