2016 has been a difficult year for active management. Hedge fund managers have been unable to match the relatively strong performance of broader asset classes, such as equities and bonds, with the HFRX Global Hedge Fund Index in US dollar terms gaining 1.6% to 30 November. However, there has been a notable differential in returns within the index. Event driven was up significantly, led by distressed assets that have rallied as global growth concerns have been allayed, while trend-following strategies have substantially underperformed, caught out in the second half of the year from fixed income reversals after starting strongly.
The year has been characterised by a lack of breakouts. However, we believe this is likely to change as the era of extended central bank liquidity comes to an end. GAM portfolio manager Anthony Lawler commented: “At the start of the year, we noted that political uncertainty was likely to create trading opportunities and this proved to be the case, with unexpected anti-establishment victories with Trump in the US and Brexit being part of a growing global populism movement. However, the ongoing support of central banks dampened realised volatility, leading markets to recover quickly from such shocks. We expect this political uncertainty to continue, but more limited central bank appetite for QE could take away a significant element of market support. An increasing range of economic outcomes and higher yields provide more fertile trading conditions for active managers, which we believe should prove beneficial across asset classes.”
GAM also expects relative value strategies to benefit from market tailwinds, and to play a key role in client portfolios. Lawler notes: “Given a macro environment set for increased volatility, managers who can benefit from micro dislocations are expected to be at an advantage. We would anticipate fixed income relative value strategies to continue their strong run through 2017, as a wider range of market participant views and lower liquidity creates greater dispersion. Higher volatility also provides a good opportunity set for relative value volatility managers, who are able to benefit from market dislocations and flows. Volatile markets have also historically been complementary for systematic strategies, especially in the shorter-term space.”
Lawler suggests market moves have led to evolving prospects in credit: “As we identified this time last year, credit was one of the key stories of 2016 and performed well. The asset class was boosted by the recovery in energy prices, supportive equity markets and an ongoing reach for yield. The absolute attractiveness of the asset class has fallen as spreads have tightened, but more late-cycle dynamics in the US create wider dispersion between names, and trading opportunities in event driven and long/short credit strategies. In addition, we would look for increased corporate activity in response to expectations of future rate rises and potential decreased regulation to support an increase in M&A activity.”