Whilst the Federal Reserve kept an overall dovish tone in its latest minutes released on Wednesday, Fed officials have started discussing the timing of a rate hike due to renewed confidence in the US economic recovery. At this stage, an initial hike of Fed rates in June seems optimistic, but strong employment gains are clearly putting some pressure on the Fed to act soon. 

Philippe Ferreira

Head of Research - Managed Account Platform

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Whilst the Federal Reserve kept an overall dovish tone in its latest minutes released on Wednesday, Fed officials have started discussing the timing of a rate hike due to renewed confidence in the US economic recovery. At this stage, an initial hike of Fed rates in June seems optimistic, but strong employment gains are clearly putting some pressure on the Fed to act soon. Since the start of the month, this has been reflected in the market environment, as investors are showing concern about the future path of US monetary policy. Whilst January was marked by deflationary pressures, with lower rates and commodity prices across the board, February has so far proved to be a volatile month in these asset classes.

Last week was marked by a spike in oil prices, along with higher US and UK rates. It appears that the “normalization trade” which begun at the end of January gathered momentum, and it brought significant dispersion in the hedge fund space: previous winners (long-term CTAs, L/S Equity funds) are underperforming, while most strategies which were harmed last year (Event-Driven, Convertible Arbitrage) managed to offset their year-to-date losses.

Event-Driven funds are now back to positive territory, thanks to strong gains on energy names and idiosyncratic positions, mainly on the special situations bucket. Russia and Greece are making headlines again, but their impact is rather muted beyond their local markets.

Two strategies managed to make the best of two different set of market conditions witnessed in January and February respectively: macro managers and short-term CTA funds. Global macro funds have posted strong performance since the start of the year and are resilient in the current context, thanks to a reduction in their risk exposures and short positions on US rates. Short-term CTAs have provided uncorrelated returns in the last few weeks, benefiting from a higher volatility regime.

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