Reduced market volatility is driving strong performances on the credit and global equity markets. Corporate bond yields have hit historic highs as investors increasingly seek out positive real returns.

But how long can low interest rates and low volatility be expected to last?

At this point, we are keeping our allocation virtually unchanged. We firmly believe that the combination of a US economic recovery and reasonable valuations will continue to provide solid fundamental foundations for our sector specialists.

In Europe, we are keeping up our research and analysis efforts, gradually adding more fund managers from the equity, multi-strategy and fixed income classes.

We have significantly reduced one of our top US holdings (a quantitative multi-strategy driven by value factors), as well as two of our top credit holdings. On the other hand, we have strengthened our positioning within the fixed income relative value space by increasing the weighting of two holdings.

 

LONG SHORT EQUITY

Although we are still positive on this strategy, we prefer management approaches with a lower net bias and a gross exposure of around 150/200, as dispersion within sectors is picking up.

Europe seems more compelling in terms of valuation and central bank actions, on the back of the recent QE measures and some positive signs of economic growth.

Asia is also benefiting from strong technical backdrop and a supportive monetary policy.

 

GLOBAL MACRO

Adjustments of monetary policies through currencies and historical low levels of interest rates may act as tailwind for the strategy

 

QUANT STRATEGIES

Some specific Systematic strategies have been powerful contributors in recent months on the back of trends across oil, rates, FX among others. In the market-neutral quantitative arbitrage space, performances continue to be positive, albeit weaker than over the past couple of years. We are looking closely at some factors (value and momentum), as this space might become too crowded. Trend followers are benefiting from the current environment.

 

FIXED INCOME ARBITRAGE

The opposite direction taken by ECB and BOJ with their QE while US is ending its program has triggered an increasing volatility within the fixed income space. Relative value managers have and should benefit from it for 2015.

 

EMERGING MARKETS

Emerging markets continue to be a mixed bag

  • The transition towards economies driven by domestic demand is only just getting started, especially in China. We are seeing positive signs from the changes in monetary policy and anti-corruption actions in China. We may add some exposure to the country.
  • Of course, the situation differs greatly from country to country. In some cases, key rates oversight is very effective, while other countries that are highly dependent on foreign-currency funding sources are being stretched to the limit due to cash repatriation.

Although this contradictory situation can also be seen in equities, high-quality stock-picking can still be profitable.

 

RISK ARBITRAGE - EVENT DRIVEN

  • While we believe that this strategy continues to make sense, its net long bias may put it at risk in cases of strong market disruptions. If the M&A volume in 2014 has hit its best year for deals by value since 2007, it seems that 2015 is on its way to breaking those figures, on the back of strong activity in both the healthcare and telecom sectors.
  • This being the case, we prefer to focus on US managers with a diversified foothold in both equity and credit deals, with a combination of hard and soft catalysts. We also notice an interesting development in “constructivism” vs. “activism” trades – and believe that this approach is likely to be more widely accepted in the case of European companies.

 

DISTRESSED

The distressed debt offer is still extremely limited for the time being. We do not see any immediate opportunities in this strategy. Nevertheless, the energy sector where massive issuance has taken place over the recent years may soon become an attractive pool of opportunities given the massive disruption in oil prices and its impact on these securities.

 

LONG SHORT CREDIT & HIGH YIELD

Demand and flows are as strong as ever on the back of yield chasing (the 10-year bund has hit 5 basis points as we write).

  • We are less active in this space as we are more in favour of equity related strategies. We prefer managers looking for idiosyncratic investments. One of our managers in that space has clearly taken a more bearish positioning over the asset class through put options in the recent weeks.

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