Risk assets rallied in the wake of Draghi’s comments which signaled that the ECB stands ready to extend QE at its December 3 meeting. After years of non conventional monetary policies, there is a strong sense of déjà vu.....
There is nonetheless hope that the improved risk appetite is not simply the result of central bank accommodation, whose marginal returns could be diminishing.
The flash PMI indices for the euro area were above expectations in October, both in the manufacturing and services sectors. On top of that, the ECB’s bank lending survey suggested further improvements in borrowing conditions for businesses. In the US, companies exposed to the bullish US consumer, such as Amazon and General Motors, posted earnings above expectations. The new economy is also healthy with Microsoft and Alphabet (Google) beating earnings estimates.
Hedge funds have benefited from this improving market environment. Most strategies were up during the period under review and the Lyxor Hedge Fund Index is on track to experience a welcome bounce back in October following the drawdown in Q3. Month to date, CTAs are underperforming (-2.8%) due to the trend reversal and Event Driven is outperforming (2.6%) as volatility conditions eased; (the VIX fell back below 15% for the first time in two months). L/S equity is up as well, with long-biased managers outperforming market neutral and variable biased funds.
Over the recent weeks, we have reiterated on several occasions our view that the market pessimism was exaggerated and that conditions would improve. In this framework, we stated that Event Driven managers were due to rebound and Global Macro managers would outperform CTAs. We stick to our guns and reiterate these views. Meanwhile we are getting warmer on European L/S Credit and within the L/S Equity space, we continue to prefer strategies with less directionality as we think that optimism should somewhat be tempered.