Why event-driven should be preferred to L/S equity

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The Weekly Brief

Data crunchers are finding little evidence of a growth deceleration in the U.S. so far in 2019. The job market remains buoyant and business surveys signal robust manufacturing activity in January. On the contrary, in the euro area, it is hard to find evidence that the economic deceleration has reached a bottom. Coupled with the softer stance from the Federal Reserve, growth divergences have probably contributed to the outperformance of U.S. vs. European risk assets year-to-date (including both equities and high yield credit). Moreover, the rebound in U.S. equities was fueled by cyclical sectors, which signal renewed optimism. Recent hedge fund performance was influenced by such market movements. Strategies that are more sensitive to cyclical sectors such as L/S Equity and Special Situations outperformed in January. Meanwhile, defensive strategies underperformed (Merger Arbitrage, L/S Equity Market Neutral, Global Macro/ CTA) though most of them still managed to deliver positive returns. Going forward, our views remain unchanged. We continue to prefer defensive strategies such as Merger Arbitrage and Fixed Income Arbitrage and stay cautious on high beta strategies such as L/S Equity strategies with a long market bias