From Global Asset Management
May was a positive month overall for US and European equities, but also a month of sustained weakness across major bond and credit markets. Equity markets had a strong start, but then reversed in the second half of the month. The most prominent example of this was the Japanese Nikkei index, which ended the month slightly down after rallying early in May and then selling off by more than 11% in the latter weeks of the month. Bond markets were challenging with negative returns for US Treasuries, German Bunds and UK Gilts. Hedge funds were up 0.7% for May and 4.6% year-to-date, as measured by the HFRX Global Hedge Fund index.
Anthony Lawler, Portfolio Manager at GAM, said: “April was a tough month for bond holders with the Barclays Global Aggregate Bond index down 3.0% for the month and 3.7% for the year. This generated concern for the average traditional or balanced portfolio that is not getting the yield nor the capital protection expected from bond allocations.”
On hedge fund strategy and trade performance, Lawler said, “It was a positive month for equity hedge, event driven and relative value strategies. The results were mixed for global macro and trend following managers given the strong reversals in numerous markets in the second half of May. Across all strategies, trades that caused pain included long fixed income positions and long exposures to the many markets that reversed or were choppy, including energy, Japanese equities and soft commodities. Some of the large positive attribution trades were well-managed US and European equity exposures, long US dollar positions against several currencies, continued short Japanese yen positioning, short Australian dollar and long interest rate volatility positions.”
The volatility and weakness in perceived safe-haven government debt is a new dynamic that has raised concerns for investors. The cause of US Treasury weakness in May continues to be debated, said Lawler. “Commentators have largely concluded the main driver to be a shift in market expectations of the timing of QE tapering by the Federal Reserve. However, we also see signs that the selling pressure in US Treasuries was driven by the combination of increased bond market volatility together with large mortgage investors needing to sell Treasuries to hedge their books. This is important. If, as some hedge fund managers have said, US Treasury weakness has not only been driven by QE tapering fears, but rather has been driven more by these two factors (selling Treasuries in order to hedge mortgage books and to reduce risk given the increase in government bond market volatility), then this could be closer to a one-time move in Treasury yields rather than the beginning of a sustained move higher in rates. Time will tell which cause is more dominant, but May has certainly rattled investors with large bond portfolios.”