Hedge funds: risk-off mode in equities

Macro managers have reduced their equity exposure amid modest positive returns year-to-date, while long/short equity managers have been challenged by sharp market rotations.

Equity risk in macro managers’ portfolios is below the historical average. Many expect stock markets to trend lower not necessarily because of a coming recession but because of peak margins and outflows from petrodollar-dependent sovereign wealth funds.

  • The effectiveness of QE programmes is also being questioned as growth and inflation remain subdued. In Europe and Japan, equities are lower and currencies are stronger now than before QE programmes were announced.
  • While the environment should be conducive to short-side opportunities, long/short equity managers are being faced with a series of sharp reversals that are hammering their long books.
  • Region-wise, long European equities with domestic exposure versus those with exposure to emerging markets – a winning theme in 2015 – has been causing pain since January.
  • Sector-wise, most long-held sectors such as healthcare, consumer discretionary and tech, which were positive in 2015, were registering double-digit losses by end-February.
  • Style-wise, momentum stocks have fared worse than the S&P500 since the start of the year.

These sudden reversals have all been a drag on performance; yet market dislocations should provide fertile ground in the long term for nimble stock-pickers.

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