GAM Insight - Hedge Fund Performance Update - August 2014
Markets recovered their July losses, with the MSCI World index up 2.2% in August, while the reach for yield resumed with the Barclays US Aggregate Bond index rallying 1.1% and US high yield credit up 1.6% (IBOXX HY index). Hedge funds overall posted gains in August with the HFRX Global Hedge Fund index up 1.1%, with each of the four main hedge fund trading strategies generating positive returns (all returns stated are in US dollar terms).
“In August, the market delivered the results of an important test”, said Anthony Lawler, Portfolio Manager at GAM. “High yield credit had sold off on high volumes in July. In August, investors were concerned that illiquidity and a lack of buyers could cause additional meaningful losses in high yield, which could then trigger contagion selling in other asset classes. This did not happen. What we saw instead was that once high yield had sold off a few points, buyers came in to take advantage of the higher yields on offer. This was market confirmation that the reach for yield remains a dominant investor theme even at these tight credit spreads and low interest rates.”
GAM expects the reach for yield backdrop to continue to benefit hedge funds that employ credit, relative value and event driven strategies, continued Lawler. “The event driven equities strategy is a beneficiary of the stable low rates policy environment with credit markets open to large corporate borrowers. We expect to see this strategy continue to perform. We also continue to see value in certain asset-backed markets, where credit and relative value managers are earning good returns.”
Global macro posted its fourth consecutive positive month, with managers being rewarded for trades in currencies and equities. Lawler added: “We remain cautiously positive on the outlook for global macro, and August supported this view. Managers benefited from the strong US dollar, weakness in the yen and the euro, and from tactical longs in equity markets. Perhaps more importantly, we continue to see divergence around the globe in economic data trends, growth rates and differing central bank policies. That divergence is creating opportunities for macro traders through the dispersion in the price paths of interest rates, currencies and other assets. But we remain cautious in our outlook because geopolitical risk is currently elevated, which could lead to hedge funds reducing risk.”