Hedge Funds continue to display high resilience



The focus remained on China, with PBoC announcing a surprise Yuan devaluation and steps towards the liberalization of its quotation mechanism. While factoring the outright impact of the approximate 5% devaluation against USD - in EM currencies and in exports sectors - markets also read this development as an additional sign of slower Chinese growth.

Concerns about weaker Chinese demand built up deflation fears over the summer.
These were amplified, not triggered, by the CNY devaluation. Since then, risk aversion has stepped-up with an identifiable domino of themes. Indeed, a weaker Chinese demand has weighed on commodities' demand and prices and sapped the growth outlook for many EM countries, further weakening global growth prospects. In turn, it is keeping the Fed all the more cautious which is weakening support in reflation zones (via USD). Both the trim in economic forecasts and the plunge in resources are feeding global deflation fears.

Hedge Funds were not immune to this sell-off, slightly down last week. Indeed, the
reversal in USD hurt Global Macro managers while Event Driven funds remained
under pressure.

However, put in perspective, Hedge Funds have been displaying elevated resiliency and seem well positioned relative to traditional assets. The return of dispersion and the emergence of multiple themes are helping L/S Equity managers produce strong alpha. Macro traders are also benefitting from a flurry of relative value opportunities, thanks to their conservative positioning, and have been able to successfully navigate the markets. Event Driven is lagging; the corporate situation remains unsettled by macro drivers and has been adversely impacted by sector bias.

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