Fed and France Spark Turnaround
The stall in the “Trump Rally” that began in the second half of March carried through to the first half of April before it reversed. A combination of positive earnings announcements, some clarification on the Fed’s plans to “shrink” its balance sheet, and the results of the first round of the French elections provided the spark for the turnaround. International assets continued to outpace the U.S., based on stronger local returns and a weaker dollar vs. the Euro and the British Pound.
The yield curve1 flattened, as the long end rallied over the month. The short end of the curve was mostly unchanged. The credit spread2 bounced around before settling a little lower.
On the economic front, the advanced estimate of first-quarter GDP was below expectations at 0.7%. Headline inflation went down to 2.4%. Employment gains were positive, but failed to hit expectations, coming in below 100,000 for the month. Consumer confidence dropped.
Hedge funds had positive returns, with the broad index up for the month. Seven out of the eight strategies had positive returns, with Convertible Arbitrage, Equity Hedge, and Event Driven leading the way. Merger Arbitrage and Distressed also had strong months.
Key Economic Data3
- The U.S. Bureau of Economic Analysis (BEA) released the “advanced” estimate of real gross domestic product (GDP) growth of 0.7% in the first quarter of 2017. Real GDP grew by 2.1% in the fourth quarter of 2016, 3.5% in the third quarter, 1.4% in the second quarter, and 0.8% in the first quarter.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was -0.3%. Core inflation (CPI-Ex Food and Energy) was -0.1%. For the last 12 months, the CPI-U NSA was 2.4%, and the CPI-Ex Food and Energy was 2.0%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm jobs increased by 98,000, after adding a revised 219,000 jobs in the prior month. Private sector payroll employment added 89,000, jobs following a revised increase of 221,000 jobs in the prior month. The unemployment rate was 4.5%. The underemployment rate was 8.9%. The labor force participation rate was 63% last month.
- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that sales of new single-family houses were 621,000, a change of 5.8%. Housing starts were 1,215K, a change of -6.8%. Building permits were 1,260K units, a change of 3.6%. Existing home sales were 5.71 million units, a change of 4.4%.
- The Conference Board Consumer Confidence Index® was 120.3.
- A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
- A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
- IndexIQ. FactSet as of 4/30/17
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All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Investors cannot invest directly in a benchmark.
Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds that involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.
Event Driven investing is designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.
Equity Hedge investing buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.
HFRI Hedge Fund of Funds Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.
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