Bond yields continued to edge higher over the recent weeks on the back of stronger economic data and higher inflationary pressures. The rise in bond yields was more pronounced in Europe than in the U.S. across the curve, which contributed to the appreciation of the Euro vs. USD in January. This environment has proved supportive for risk assets in the U.S. and emerging markets.

According to Tarek Issaoui, Head of Cross Asset Flexible Solutions at THEAM, coming months and years will most probably see more differentiation between the performance of flexible funds. As diversification benefits become less important, drawdown management will develop into a key element of underperformance or outperformance over the peer group.

We believe now is a good time to ready bond portfolios for reflation: improving growth, wage gains and higher inflation. We see global reflation running further in 2017 and spurring a modest rise in global bond yields.

Equities continued to make new highs as we moved into 2017, but we are mindful that the outlook is littered with macro-economic and political risks – not least the forthcoming elections in France, Holland and Germany, Article 50, and President Donald Trump.

The Preqin All-Strategies Hedge Fund benchmark posted returns of 7.40% in 2016, marking the best performance year for the industry since 2013 and more than tripling the gains made through 2015 (+2.03%). Despite a volatile start to the year which caused some performance difficulties, hedge funds rebounded to post positive returns in nine of the final 10 months of the year.