INSIGHTS

Stefano Sciacca

Fri, Nov 22


Climbing Stock Market, Plateauing Hedge Funds Performance

Risk-On positioning continues to characterize what in 2019 seems to be an invincible bullish stock market. Over the last month, the S&P 500 has rallied by more than 3 percent, while the 10y US Treasuries and Gold have weakened. Fund managers, still holding an unprecedented amount of cash, are showing signs of optimism after a less-worse-than-expected Q3 earnings season, when the overall S&P EPS decline initial projection of circa -4% has been step-by-step revised upwards along with the big corporates reporting promising results and outlook. That said, last week’s 10y US Treasuries rally suggests a possible change in sentiment as optimism around trade negotiations seem to slowly start fading. To conclude, the SPX trend looks “spiky” and “fragmented” as being largely driven by trade commentary-related algorithmic trading.  

 

 

But how is the extremely lucrative Hedge Fund industry generally performing and reacting to all of this “noise”? According to a recent note published by Goldman Sachs, the speculative funds are only up a modest 10% Year-to-date (vs the S&P at 23%). Once again, active managers, who traditionally charge the infamous 2-20 management fees (2% on Asset Under Management and 20% on Profit), are underperforming what over the last decade has emerged as a “risk-free benchmark” (that does not charge any management fees). A question should unanimously arise: How can the S&P 500, which is by definition representative of the US Stock market and reflective of the US Economy, be risk-free? The answer is very simple and relies on Central Banks’ readiness to promptly inject extra-liquidity pumping-up the stock market, any time there is a modest drop) and fuelling-up the “liquidity trap”, which is now forcing the Central Banks to keep the interest rates low.

 

 

Back to the Hedge Fund topic, the result of this prolonged “expensive”-for-the-clients underperformance is an unprecedented queue of clients’ redemptions not seen since the 2008 financial crisis. The most affected strategy has been the traditional Long/Short category which suffered $41bn in redemptions so far this year, followed by macro managers who experienced outflows for $23bn. Only in October, investors have pulled as much as $6.2bn out of the Hedge Fund industry. The trend is clear, 2019 will likely be the best year in the stock market since 2013 and the worst for hedge funds fighting a cumulated whopping $88bn capital redemption. On a positive note, according to Bloomberg research about 45% of funds have posted positive net inflows this year, as Event-Driven funds lead the way with $13.6bn of net positive inflow in October only.

 

 

Next week our macro spotlight will be on?

 

Monday:

  • Ifo Business Climate – Germany

Tuesday:

  • GfK Consumer Confidence – Germany
  • Finance Mortgage Approval – UK
  • Goods Trade Balance – US
  • Wholesale Inventory – US
  • Redbook – US
  • New Home Sales – US
  • Richmond Manufacturing Index - US

Wednesday:

  • Industrial Profits – China
  • Consumer Confidence – France
  • Personal Spending – US
  • Personal Income – US
  • GDP Growth Rate 2nd Estimate – US
  • Corporate Profits Preliminary – US
  • EIA Crude Stock Change – US
  • Continuing/Initial Jobless Claims – US

Thursday:

  • Loan Growth – Eurozone
  • Economic Sentiment – Eurozone
  • Consumer Sentiment – Eurozone
  • Industrial Sentiment - Eurozone

Friday:

  • Unemployment Rate – Japan
  • Industrial Production – Japan
  • GfK Consumer Confidence – UK
  • Unemployment Rate Harmonized – Germany
  • Mortgage Lending – UK
  • Unemployment Rate – Eurozone
  • Chicago PMI -US

 

Chart of the week

 

 

Fact of the week

 

What seemed to be an already-secured “Phase One” deal turned out to be tougher than expected to seal. Chinese officials and media remain silent although Trump threatened for the second time in a week to raise the tariff even higher if a trade deal cannot be reached.

 

Quote of the week

 

“Public investment in the euro area remains some way below its pre-crisis levels. The share of productive expenditure in total primary expenditure – which in addition to infrastructure includes R&D and education – has also dropped in nearly all euro area economies since the crisis. And new investment needs are emerging.”

Christine Lagarde, newly elected ECB Governor on Europe need for increased public investments 

 

“China is going to have to make a deal that I like ... If we don’t make a deal with China, I’ll just raise the tariffs even higher”

Donald Trump, USA President on a potential trade war escalation.


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