What a year, thanks to Donald Trump. Hedge funds seeking volatility finally got what they wanted this spring as a range of events weighed on markets, including trade wars, political tensions in Turkey, and Trump’s approach to currency and interest rates. This volatility and the uncertainty it created benefited dedicated hedge funds strategies, such as fixed income arbitrage, while equity beta-driven strategies suffered. US long/short equity strategies focusing on healthcare and technology were less impacted and capitalised on the strong rallies in their respective sectors. Others, such as merger arbitrage strategies, were directly hit by Trump’s actions. The $44bn Qualcomm-NXP merger is a great example of casualties resulting from US-China trade tensions. Overall, return dispersion across strategies and managers was important and so was the emphasis on selection.
Since the beginning of the year, the hedge fund industry has successfully navigated a complex environment, while most asset classes suffered, with the exception of the US equity market. Notably, risk parity and multi-factor risk premia strategies, which had raised massive assets in recent years, struggled as well. We believe the opportunity set for hedge funds is growing. Short-term US interest rates are rising, realised volatility is exiting years of lethargy and markets are more fundamentals-driven, as witnessed by the improving intra-stock dispersion. While it is too early to firmly call, it seems we are finally heading toward a pre-2008 crisis framework.