The second quarter was mixed for hedge funds. Most strategies posted gains in April and again in May despite the poor performance of markets towards the end of the month. But June is likely to be a negative period for alternative strategies overall. Notably, equity long–short managers delivered strong returns owing to rising markets across many regions and sectors. Many equity long–short funds have used the recent weakness to add to their high-conviction positions and are therefore well-placed to benefit if equity markets pick up.
Rothschild WM: Performance of global macro strategies
The performance of global macro strategies has improved since the start of 2013 after a lacklustre display last year. They are positioned to benefit from higher market volatility and increasing discrepancies in global economic growth. Should the recent weakness continue, this strategy could help to protect portfolios. Relative value managers have also performed well this year. In a muddling through scenario diversifying hedge funds with limited market exposure such as relative value could offer additional protection.
At the start of the quarter, managed futures funds (CTAs) profited from more accentuated trends in equities (long exposure), the yen (short) and energy (long). May was more challenging due to the strong reversal of trends across many markets. Yet we continue to like this strategy because of its ability to offer protection in a downside market trend combined with positive absolute performance over the long term.
Rothschild WM: Commodities
Commodity markets have been falling since the start of the year owing largely to oversupply across many sectors. There have been some exceptions, notably in energy markets. US natural gas prices have risen in line with an increase in demand. Oil prices ended the quarter largely unchanged and we believe they will stay within a range of $90 to $110 per barrel. That is largely because OPEC is likely to reduce production if prices fall below $100.
Gold prices fell as low as $1,321 per ounce (intraday) in April and fell again in June after the Fed suggested it may begin to taper asset purchases. Price volatility rose above 30%, which is rare and often signals a rapid change caused by distressed selling. Previous occasions of similar volatility coincided with the 2008 market crash and late 2011 when Spanish and Italian bond yields spiked. In 2008 gold volatility spiked into the bottom of the market, whereas in 2011 it was associated with the gold price hitting new highs and then retreating rapidly. High volatility does not normally last for long but creates a lot of uncertainty and unpredictability for gold prices.
We expect gold prices to continue to be volatile over the short to medium term. However, seasonally higher physical demand in the third quarter should create a floor under them. The lack of an obvious macroeconomic event as an explanation for falling prices over the second quarter makes it difficult to identify what could drive them higher or lower from here.
Rothschild WM: Real Estate
Listed global real estate suffered a substantial correction in May. Asia gave back all of the gains it had made since the start of the year although the UK, US and Europe remain in positive territory. Markets are concerned that real interest rates will rise, which would not support the high valuations of listed real estate.
Physical real estate had an exceptional rally in 2012 and has continued to benefit so far this year from the market’s healthy appetite for commercial property. Investors are searching for yield in a low interest rate environment and have been encouraged by the reduction in macroeconomic risks and selective improvement in debt markets.
The rental markets have been less resilient, largely because companies are focusing on increasing productivity and saving costs rather than expanding. Prime rents are forecast to increase at an average pace of just 2% to 3% in 2013. However, given a shortage of high-quality space and the low construction pipeline, even a modest uptick in demand above baseline projections could trigger rental spikes in some markets.