Global Markets Weekly

Transcription

1 Global Markets Weekly Edition 1, Vol. 22 A risk dimensions publication February 1 st 2013 Mark R. Connors mark@riskdimensions.org Hedge Fund Underperformance A call to retool Features Rule #51: Sometimes you re wrong. For Leroy Jethro Gibbs, the main character of CBS hit show NCIS, life is ordered by a series of succinctly enumerated rules to follow. managers have previously relied upon are now blunted. First, strategies reliant on active trading to generate Alpha have been hamstrung from lower Asset Class overview pgs 2 thru 3 Equity Record January performance fuelled by inflows Credit One engine fails as rates hamper returns. The returns from both the HFRI Equity Hedge and Macro strategies have demonstrated negative Alpha for the first time since their inception (and) likely NOT a coincidence Today s hedge fund manager is well served to borrow a page from Gibbs rule book as the expected outcomes associated with Modern Portfolio Theory (MPT) have been proven wrong. In our Weekly Highlight on page 4, we illustrate the undeniable trend in Alpha diminution since the onset of the credit crisis in More recently the returns from both the HFRI Equity Hedge and Macro strategies have demonstrated negative Alpha for the first time since their inception. Each has dipped below for a period, but tandem negative Alpha is a first, and likely NOT a coincidence, which brings us to Rule # 39: There is no such thing as a coincidence. On the contrary, there are many reasons why the tools hedge fund volumes since the advent of the Volcker Rule, decline in the number of broker dealers and other market and regulatory factors. Second, announcements from Washington & Belgium continue to trump those from corporate boardrooms. This has neutralized the brain power behind fundamental researchdriven strategies as macro factors serially swamp the expected market action from quarterly EPS announcements. This is not the death knell for Hedge Funds, just a call to realign their firm s resources to capture today s source of Alpha. Reducing leverage was just the first step. Rates Developed Markets backup, UST 10Y breaches 2% Currencies JPY orchestrated devaluation in the 1 st inning. Commodities Broad-based positive returns Weekly Highlight pg 4 S&P 500 earnings and multiple reviews. Where do we go from here? DataBank pg 5 - View price/ spread movements and across Global markets. Risk Heat Map pgs 6 thru 7 Market Risk Alert (MRA) RAISED to 2, on scale of 1 (low) to 5 (high) Risk Methodology pg ph

2 2/1/2013 Returns by Asset Class (Global) 8% 6% 4% 6.2% 3.1% US EUR YTD (loc) 5.4% 3.4% 2% 0% -2% -4% 0.5% 0.4% 2/1/2013 Equity Credit (HY) Rates COMDTY -0.5% (MTLS/AG) Currencies -0.8% (DXY/EUR -1.7% -2.4% 8.0% 6.0% Global Equity Indices (loc) S&P 500 (US) DAX (GDR) FTSE (UK) IBEX (SPA) FTSE (ITA) HANG SENG (CH) Global Credit (loc) YTD (loc) 15.0% 5.0% -5.0% - S&P 500 (US) Euro STOXX HANG SENG (CH) DAX (GDR) FTSE (UK) IBEX (SPA) FTSE (ITA) 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% YTD (loc) CDX.IG CDX.HY Bk Loans ITRX_XOVR 5.0% 3.0% 1.0% -1.0% CDX.IG CDX.HY Bk Loans ITRX_XOVR 6.0% - Global Rates 10Yr Govt's. (loc) YTD (loc) 1.0% -1.0% US Germany Italy UK Switzerland Japan % Commodities (USD) Currencies YTD Gold SILV OIL Corn 5.0% 3.0% 1.0% -1.0% % 8.0% 6.0% - - US Germany Italy UK Switzerland Japan Gold SILV OIL Corn YTD YTD 5.0% - DXY EUR AUD GBP JPY EURCHF -5.0% DXY EUR AUD GBP JPY EURCHF % -15.0% -8.0%

3 Asset Class Overview Equities * Credit * Rates * Currencies * Commodities Equity Record Inflows of 34B into US Equities v November s -15B outflows and positive economic news drive global equity indices to record levels. The S&P 500s +6.1% YTD level is best in post-internet bubble era. Energy, Healthcare and Financials lead all sectors YTD at +8.6%, +8.1% %. Info-tech lagged all others at +2.4%. The broader Stoxx 50 is up 2.8% through Friday, but the Swiss Index at +8.8% followed by the FTSE 100 at +7.6% outperformed. Major Asian equity markets have posted YTD results in the 5 to 8% range while non G-20 emerging markets have lagged all segments at either side of flat. Credit One engine has failed. Credit spread compression and declining rates were the twin engines propelling credit portfolio return in In January, one of those engines failed. Investment Grade corporate bonds have posted three consecutive down months as measured by the ML Corporate Bond Master Index. The less interest rate sensitive ML US High Yield Index Master II is still posting positive quarters as its spread is offsetting the back-up in rates, +0.8% YTD Rates Risk Markets absorb back up in rates as UST 10Y breaches 2% for first time since March Developed Markets curves steepened as the long end underperformed the short end in an almost wholesale backup in interest rates. Positive economic data coupled with less certainty of the FED engaging in a QE4 being the driving forces. Currency Yen underperformance accelerates in January. Swiss Franc s 2012 appreciation takes a breather. The Japanese Yen s 6% decline in January vs. 44 major currencies outpaced the 15% rate of devaluation posted in the last 4 months of As the 3 rd largest economy, this level of devaluation has meaningful and long term implications for global investment and GDP. The Swiss Franc outperformed fewer currencies in January vs as a whole as investors sought riskier and higher yielding assets. The Korean Won s recent depreciation vs. the USD is close to a 5yr record. Commodities Positive performance varies by degree across the Energy, Agriculture and Metals Complexes. Metals varied YTD performance mimicked the wide spectrum of returns usually reserved for the agricultural segment as Gold, -0.5% YTD underperformed housing sensitive Copper +3.6%, Silver +4.9%, and Platinum, +9.4%. Economically sensitive Brent is up +5.1% YTD as the volatile Nat Gas (4x more volatile than Gold or Brent) posted a small -1.5% loss YTD. Ag was mixed across Corn +5.4%, Wheat -1.7% and Coffee +2.9%.

4 Weekly Focus Equities * Credit * Rates * Currencies * Commodities * Risk Hedge Fund Underperformance The favorable return characteristics that attracted investors to Hedge Funds over the past two decades are waning. Alpha is either side of zero depending on the size and strategy of the Fund or Index being measured. Correlations remain high for all liquid strategies and returns have lagged their benchmarks since Despite this lackluster Hedge Fund performance, Investors remain leery of outright, beta-reliant strategies given the potential fallout from European Dis-Union and the FEDs Zero-Rate Policy. Winners in 2013 will distinguish themselves from the pack by adopting structural changes to their portfolio and enterprise to reverse this trend. 4 3 HFRI Hedge Fund Alpha vs. S&P 500 Index Rolling 12M average of one year sampling / Monthly data December 1991 thru December 2012 HFRI Eq. Hedge HFRI Macro Several Multi-billion dollar Multi-strategy and Long/Short Equity Funds we tested shared the same trend as the HFRI Indices pictured below and below. Hedge Funds outperformed on the downside twice in each of the 90s and 00s. However, since the start of the current decade, the majority of Hedge Funds have underperformed their benchmarks on an absolute basis with some solace provided by still-favorable Sharpe and Sortino ratios (available separately). HFR Equity Hedge Index 12 Month Rolling TRR vs. the S&P 500 December 1990 thru December HFRI Eq. Hedge S&P Data Source: Bloomberg

5 DataBank Equities * Credit * Rates * Currencies * Commodities

6 Risk Heat Map Equities * Credit * Rates * Currencies * Commodities

7 Risk Heat Map Detail Attribution across Global Markets 0 % ind icates Max Risk On / 100% in dicates Max Risk Off All Values Scaled 0 to 100% MARKET RISK Private & Central Bank Positioning Fund Flows Vol Credit Spread Corr Fndg. Mkt CB On Off % of Max Level Eq/CCY HY Bank Sov S&Pv1Sht Trm Volumes Bal Sheets Eq/HY MMkt % of 1Yr Max Risk 4% 1% 1% 9% 62% 16% % of 1Yr Max Risk 28% 97% % of 1Yr Max Risk 65% 0% % of 5Yr Max Risk 30% 23% 23% 43% 57% 23% % of 5Yr Max Risk 59% 97% % of 5Yr Max Risk 85% 100% % of Occurrence:. Riskiness of Current Level: 1Y 22% 1% 2% 12% 33% 39% Riskiness of Current Level: 1Y 57% 90% Riskiness of Current Level: 1Y 91% 64% Riskiness of Current Level: 5Y 15% 7% 9% 69% 45% 51% Riskiness of Current Level: 5Y 45% 97% Today's level vs. 5Y distr. 86% 68% Direction & Degree of Change Riskiness of 2D Chg: 1Y 33% 18% 61% 65% 4% 37% Riskiness of 2D Chg: 1Y 50% 51% Riskiness of 2D Chg: 1Y 14% 27% Riskiness of 2D Chg: 5Y Data 32% 22% 54% 75% 6% 35% Riskiness of 2D Chg: 5Y Data 52% 53% Riskiness of 2D Chg: 5Y Data 26% 29% 2/1/2013 Market Risk Positioning Fund Flows Vol Credit Spreads Correl Funding Credit/ Equity Volumes Bal Sheet Mutual Fund Flows 2mo lag Prim'y EU R on R on R off S&P DAX AUD$ US BofA ITALY S&P v OIS AU v 2Y Sw Sprds US IG S&P 500 Dealer Bank Fed Bal ECB Bal Equity HY Bond Strat Inc MMkt Date VIX V2X Skew HY 5Y CDS 5Y CDS 10Y Euro LIB Eurib AG US ESP Bonds Index Corps Liq Sht (tr) Sht (tr) Flows Flows Flows Flows 2/1/ (0.1) (53) (190) /25/ (58) (0) (180) (30.1) (0.4) /31/ (0.1) (36) (185) (11.8) (3.2) /31/ (76) (3) (241) (7.7) (3.2) 11/30/ (67) (242) (7.9) (2.2) 8/30/ (2.5) (52) (313) (7.3) (8.9) 12/30/ (1.5) (77) (185) (7.0) (2.3) Min (3.9) (83) (22) (591) (30.1) (3.2) 0.9 (40.4) Max (4) (105) (1.3) % 5.2% 40.8% 1.4% 1.0% 8.7% 62% 47% 0% 2% 38% 22% 18% 80.2% 38% 99.2% 17.0% 99.9% 94.4% 69.4% 46.8% 100% 15.0% 18.3% 58.1% 22.9% 23.3% 42.5% #### 16.5% 4.5% 5.3% #### #### #### 71.4% % 25.0% 99.9% 94.4% 30.6% 53.2% 10 80% 60% 40% 20% 0% 1Y Time Frame 2/1/2013 VIX V2X Skew HY 5Y CDS 5Y CDS 10Y Euro LIB Eurib AG US ESP Bonds Index Corps Liq Sht (tr) Sht (tr) Flows Flows Flows Flows S&P DAX AUD$ US BofA ITALY S&P v OIS AU v 2Y Sw Sprds US IG S&P 500 Dealer Bank Fed Bal ECB Bal Equity HY Bond Strat Inc MMkt R I s k

8 We Provide A weekly Global Markets Survey of the five major liquid asset classes through commentary & analysis involving three core components or disciplines; I. Statistical & Quantitative tools II. Credit fundamentals III. Economic principals as they relate to the markets Our Process Define all market components, constituents and the dynamics that exist among them. Included are Market Laws; a list of factors we believe drive market stability or conversely foster instability. Deconstruct each asset class and market to identify, price and time the changing factors that drive risk. Factors include discrete elements such as instrument types making up each asset class and their valuation to more qualitative elements such as the relative health of the credit dis-intermediaries who facilitate liquidity. Apply the tools, assertions & laws of our core disciplines to generate opinions and conclusions on the markets. Illustrate our findings allowing you to calibrate factors and reach different conclusions Incorporating our three core disciplines listed above, we find that today s environment is characterized by; Declining Increasing Liquidity Central Bank (CB) Involvement Returns Volatility Confidence in the EU Sovereign Leverage Regulatory Impact, Uncertainty and requires a fundamental assessment of the private and public markets credit disintermediation process, reliance on monetary policy and limitations of quantitative analysis. This is why we triangulate with Credit fundamental, Econometric & Quantitative Analysis to derive today s risks & opportunities across the five Global Liquid Markets. The previous pages illustrate several quantitative tools used to price the absolute and relative riskiness of the markets through the interpretation of price, return, correlation, volume, and volatility data. We turn to credit fundamentals when assessing Bank and Sovereign risks through the lens of our Global Liquidity Heat Map which draws upon financial statements, price data and potential regulatory impacts on each. This piece has helped size and time recent market shocks, but we now feel several factors have blunted this once powerfully predictive tool. Economic principals are used as the foundation of our assessment of markets and their constituencies. For example, we assert that Economic principals support the inevitable Breakup of the Core 17-member EU Monetary Union given the fiscal DIS-Union. We monitor specific quantitative and credit signals to calibrate the in/out-ofthe-moneyness of this likelihood. We hope our work has benefitted your investment process and please feel free to request additional information or analysis not presented in the Global Markets Weekly.