A Dovish Fed is Set to Support CTA and Macro Managers



Markets were on standby mode ahead of the Fed’s meeting last week. Hedge funds were flat and there was little dispersion in returns across the managers. Event-Driven outperformed as equity volatility edged lower. Meanwhile, Fixed Income strategies underperformed as sovereign bond yields moved higher.

Since the FOMC meeting on September 17th, the Fed’s indecisive attitude has been met with mixed responses from the markets. A lack of guidance has not been welcomed by risk assets, bonds have rallied and the USD has eased against major currencies. It is likely that this will fuel Global Macro and CTA managers in particular.

Systematic funds are adequately positioned, being neutral equities and long fixed income. These funds also cut their long USD positions (especially against the EUR) during the summer. There are none the less discrepancies between the positioning of short term and long term CTAs.
The former have less directionality in FX and commodity markets and appear to be better suited to capture any benefits from the new market regime. In fact, long term CTAs are still long USD and short commodities. The Fed’s stance is likely to put downward pressure on the USD and some upward pressure on commodities.

Meanwhile, discretionary Macro managers are also long fixed income and are set to benefit from the ease in bond yields following the downward revision of both the economic projections and the “Dot Plot”.

Finally, the Fed’s lack of guidance over future interest rate moves could result in higher risk aversion despite this dovish stance. In the L/S Equity space, we maintain our strong preference for market neutral and variable bias strategies. Some managers in that space have delivered double-digit returns year to date and we expect this trend to continue.

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