UBS uncovers in its monthly prime brokerage report that after 4 months of moving in tandem, S&P 500 index and yield on U.S treasuries diverged in February. The analysts also found that their clients switched from net short positioning in US treasuries to neutral in February, however 10-yr USTs were still in the net short zone according to the CFTC report

Equities and US 10yr yield diverge Volatility

Lower volatility in portfolios as correlation drops

The divergence between S&P500 price index and 10-year yield means that cross-asset correlation has sharply dropped. This relationship has been unusually high since fear of taper gripped the markets in June of last year. Under usual circumstances, cross-asset correlation between equities and bonds stays negative, a dynamic which reverses in turbulent markets. The normal correlation has now kicked in once again, this fall means lower volatility and higher risk-adjusted returns in the portfolios.

Drop in cross asset correlation Volatility

Core hedge fund strategies rebound in February

It was a rebounding February, in a number of core hedge fund strategies according to the monthly report. The best performing hedge fund strategies of March came out to be equity long/short, event-driven and surprisingly emerging markets. EMs got off to a bad start this year but rebounded in the last month, and UBS clients were strong buyers of GEM equities in February along with U.S and Europe ex-UK equities.

Take a look at how Odey Asset Management is winning in bets against EMs here.

The performance of the emerging market focused strategy especially stands out since the region experienced its highest outflows over a 9-week period, removing $29.2 billion, 3.5% of AUM, from these funds’ coffers. UBS’ strategist further finds that this is the highest amount of outflows over corresponding weekly period since 2000.

Weekly Flows In Global Emerging Market Funds Volatility

Hedge funds and long-only clients chase opposite regions

Despite a difficult and hurtful January, long-only clients are still maintaining their enthusiasm for buying. UBS reports that hedge fund clients remained cautious and moved in opposite direction to their long-only counterparts. Long-only clients were net buyers in 7 regions whereas hedge funds chose to sell in 5 of these regions. Hedge funds focused their money on Pacific ex-Japan, while selling in Japan. Meanwhile long-only funds were net sellers in the U.K.

Hedge fund flows vs. long only Volatility