Stellar quarter fuelled Event-Driven returns
The reports of the “Trump trade” death have been greatly exaggerated. Since the failure of the U.S. administration to repeal the Affordable Care Act, risk assets rebounded healthily.
The MSCI World is almost back to all time high and cyclical sectors such as consumer discretionary, materials, industrials and financials outperformed last week in the U.S. and Europe. Similar encouraging signals were also apparent in rates and FX. The dollar index rebounded while the Treasury curve steepened. Overall, such market movements signal that the confidence in the economic momentum remains intact.
Hedge funds were also up during the period under review. The Lyxor hedge fund index was up 0.2% last week, 0.5% in March and 1.1% in Q1. Most strategies were up in Q1, with Event-Driven outperforming and CTAs underperforming. Within Event-Driven, special situations funds are leading the pack. Activists have particularly thrived, with leading players in this space up in the range of 4-5% year to date. Meanwhile, market neutral L/S equity funds extended their recovery last week. The Lyxor L/S equity market neutral index is up 3.3% year to date after having delivered disappointing returns last year.
From our perspective, Event-Driven remains a highly attractive strategy going forward. Exposures are balanced between cyclical and defensive sectors (though there has been a tilt toward adding to cyclicals lately), thus preventing any major reversal in market optimism from causing losses on Event-Driven portfolios. Then, CEO confidence is at a decade high and this is likely to translate into stronger corporate activity (see page 2). Finally, several elements related to the new U.S. administration may also prove supportive. Fiscal reform, if implemented in the coming months, should be supportive for sectors such as telecommunications or consumer staples (they currently pay a higher effective tax rate than other sectors) that rank high in Event-Driven portfolios. Meanwhile, the newly appointed chairman of the Federal Communications Commission, Ajit Pai, has repeatedly called for a light-touch, free market approach to regulation. This is likely to make the environment for Event-Driven managers more predictable and less exposed to deal breaks.
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