L/S Equity managers have decently navigated these markets, generating small positive alpha (especially on their short positions) but their implicit stance is diverging across regions. U.S. managers detracted only marginal alpha. They maintained their modest overall exposures throughout September and further reduced them early October, keeping limited factor tilts.
Trading conditions in China have severely deteriorated. After reaching their peak by mid-February, stocks lost earlier gains
in March, on evidence of a plateauing economy and as stretched investors' positioning unwounded. Chinese markets were
then stuck in a volatile trading range until the summer when they suffered another -15% plunge.
With risk assets back to record highs, markets are currently looking for the next catalyst that would push equities higher. But with the Fed potentially signaling a looming reduction in asset purchases at the next FOMC meeting on June 16, it seems wise to remove some risk off in portfolios from a tactical standpoint.
With bond yields facing upward pressures as the global economy heats up, finding diversification across traditional asset classes has been increasingly difficult. Equity valuations, which were propelled by low interest rates in the
past decade, are vulnerable in the face of rising bond yields.
Economic prospects in Europe are noticeably improving. The new wave of virus infections since late fall 2020 led to tighter
mobility restrictions, which delayed the European recovery. High frequency indicators suggest economic activity was down
around 20% from normal over Q1.