Dollar Upsurge Fuels Global Macro Managers

Recent U.S. data releases continued to beat expectations, leading to a huge revision of the market outlook about the Fed stance. The implied probability of a rate hike at the next FOMC meeting on March 15th rose to 100%; up from 25% a month ago. The market is currently aligned with the Fed “dot plot”, expecting three rate hikes in 2017.

This has led to a rise in short dated Treasury yields and boosted the U.S. Dollar versus major currencies. This environment is broadly in line with the expectations of Macro managers, who have maintained long positions on the U.S Dollar versus G10 currencies for some time (see chart below). Their positioning on U.S. fixed income is close to zero in net terms and, as a result, they have not been hurt by the rise in Treasury yields. Meanwhile, their preference for European and Japanese equities versus U.S. equities has paid off recently. The Lyxor Global Macro index outperformed during the first week of March, up 1.3%. More generally, it was a strong start to the month for hedge funds. The Lyxor Hedge Fund Index was up 0.8% last week, after having delivered 1% in February.

All the strategies ended the week in positive territory, and although Event-Driven lagged somewhat (+0.2%), it remains the best performing strategy year to date.

Is alpha back? There has been much discussion recently about the fact that rich valuations across asset classes and exogenous factors such as tax reform and monetary tightening would support alpha. We have ourselves discussed this theme in previous editions of this report. To some extent we see signs of burgeoning alpha. Its contribution to hedge fund returns remains modest year to date but appears to be on an upward trend over the past twelve months [1].

Over the last week, hedge fund returns outpaced both equity and bond returns. Going forward, we believe the factors discussed above will translate into a higher contribution from alpha to hedge fund returns.

Macro managers recently benefitted from their long positions on the USD vs. major currencies