FRM Commentary On Long/Short Managers

From FRM Investment Management

Despite January being a negative month for equity indices Equity Long-Short managers benefited from single stock dispersion to end the month roughly flat; European managers finished the month marginally positive, while the US was flat in aggregate. In Europe, managers suffered in the sharp sell offs, which were highly correlated and  impacted a number of commonly held positionsy1. This was especially true for those hedge funds whose strategies are more momentum driven. Dispersion in the rest of the month however, was sufficient for managers to benefit from single stock selection and finish the month with profits.

In the US managers also benefitted from dispersion, but just as the index, (S&P 500 -3.6%, Eurostoxx 600 -1.2%) marginally underperformed Europe. Earnings season has provided opportunity for managers with stock prices reacting to earnings announcements as would be expected. This included those stocks that missed earnings expectations, not something that had been happening last year; 67% of stocks that beat earnings outperformed the following day, 73% of stocks that missed underperformed the following day2. With around 50% of the market still to report earnings, the hope is that this price behaviour continues, irrespective of market direction. Manager returns were in quite a wide range in January, as would be expected with idiosyncratic moves the largest source of returns.

Credit Long-Short managers were the outperformers, finishing with strong positive returns despite spreads marginally widening over January. Managers generated returns from both idiosyncratic instrument moves and more thematic exposures. One of the themes that worked for a number of managers was short emerging markets, both through long sovereign CDS instruments and currency shorts. Several managers benefited from long exposure in the US preferred stock market, due to a technical anomoly. Retail investors always have a tendency to sell positions in December into the end of the tax year; this was magnified in 2013 by the negative performance due to rates. This reversed in January leading to gains for several managers.

Early indications are that Statistical Arbitrage managers finished the month flat on aggregate. Returns were slightly mixed in the first half of the month, but recovered in the second half; this was especially true of those managers operating in emerging markets. Across the strategy manager returns were quite volatile; however this is in line with expectations given the market movements in January. We would expect to see faster trading technical strategies outperform more fundamentally driven models. Both Convertible Arbitrage managers and Volatility Arbitrage managers were supported by increases in volatility, and ended the month with small positive returns.


1 Average net equity exposure of the Managed Futures Managed accounts on our platform (31/12/2013).
2 Source: Goldman Sachs Portfolio Strategy Research – US Equity Views (31/01/2014).