Global Macro Up Over the Top in Q4
Investors were not short of surprises lately. As expected by pollsters, Italy rejected the constitutional reform in a referendum last week. The surprise came from the fact that the market did not respond as may be expected to this latest political shock.
Bank stocks actually rallied throughout Europe in the following days. Meanwhile, a week earlier, OPEC members (and Russia) agreed to cut oil production against expectations, leading to a rally in oil prices. Coupled with the Trump election and the Brexit vote earlier in the year, investors have had to tread a thin line to avoid pitfalls and capture market rallies in 2016.
Hedge funds, which were cautiously positioned ahead of the U.S. election, have broadly started to add risk in their portfolios. During the weekly period under review, equities delivered some gains while bonds continued to edge lower. On balance, the Lyxor hedge fund index was flat last week but systematic and discretionary strategies experienced different outcomes. The main source of divergence in returns was related to commodity allocations. CTAs continued to underperform last week, mainly due to their short allocation to energy contracts. On the other end of the spectrum, Global Macro managers were up 0.5% last week which can be attributed to their long positioning on the same asset class.
Since the beginning of the fourth quarter, the divergence in returns between CTAs and Global Macro is surprising. The Lyxor CTA Broad index is down 8.0% while the Lyxor Global Macro is up 5.6% (close to a 15 percentage point gap). We cannot recall a worse bout of underperformance of CTAs vs. Global Macro in any quarter over the past 15 years.
Going forward, we believe it makes sense to start considering a contrarian strategy. During the last few months, CTAs have reshuffled portfolios significantly, cutting back their long fixed income allocations to close to zero and re-weighting equities. We believe that the post-election reflation trade may have legs, and as such, the underperformance of CTAs may soon come to an end.
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