Hedge Fund Flash Report
Macro
Macro managers reduced their risk levels.
Risk levels were brought down in December owing to a lack of visibility from central banks, the impact of the Omicron variant and year-end lack of liquidity. Commodities were a source of gains for managers, more specifically energy and, to a lesser extent, industrial metals and agricultural markets. On the rates front, US rates remain a large contributor for most managers. Currency and equity contribution was muted during the month, although several managers expect higher volatility in currencies in 2022 as greater dispersion between central banks is expected. Emerging-market-focused managers generated gains from credit positions in Latam as well as from rates payers in Eastern Europe.
Equity Hedge
Equity Hedge managers challenged by sector rotation in the markets.
Underneath the rosy picture on the broad market indices, Equity Hedge managers across the board suffered from sharp rotations in several segments of the Technology market amid rising bond yields. This rotation impacted all regions but it was especially difficult to navigate for specialists on the technology sector, irrespective of their level of net exposure.
Event Driven
High-yield bonds rallied in December.
December was a mixed month for Event Driven managers. Merger arbitrage and special-situation specialists posted positive performance. A traditional rush to get deals done before the end of the year saw more than $500 billion in transactions announced in December alone. 2021 topped all records for deal making, with the year’s global deal making standing at over $5 trillion for the first time ever.
Within credit-related Event Driven managers, high-yield bonds provided their strongest returns of 2021 in December (1.98%) following two consecutive monthly declines as concerns about the severity of the Omicron variant receded. 2021’s record pace of high-yield issuance moderated to its lightest volume since March 2020 amid the volatility in yields over the past couple of months. Default activity remained modest in December. Overall, US default activity was extremely modest in 2021: 13 companies defaulted during the year, with debt totalling $10.4bn in bonds and loans, while an additional 8 companies completed distressed transactions totalling $2.6bn. Activist managers benefitted from idiosyncratic stories as well as from the tailwind of a positive equity market backdrop in December.
Relative Value
Equity exposure drove multi-portfolio managers’ performance in December.
Relative Value strategies delivered modest gains. Multi-Portfolio managers with a significant equity exposure performed well. Dutch Auctions was a bright spot. Many companies, such as Fairfax Financial, speeded up their buy-back programmes in December, which created attractive opportunities. Fixed Income Arbitrage was relatively muted, and SPAC was the worst strategy. Discount to trust value widened across the board as the market had difficulty in digesting the continuing flow of new deals and as muted price reaction following deal announcement disappointed investors.
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