Market Volatility Surge: How to Avoid a Perfect Storm in March 2026

March 2026: A Violent Wake-Up Call for Markets

March 2026 is shaping up to be one of the most challenging months for financial markets in recent years. Once again, March delivers. Global equities, as measured by the MSCI World Index, fell by -8.5% over the month.

While the correction may not come as a complete surprise—markets had felt increasingly fragile in recent months—it highlights a key point: geopolitical risks had been significantly underestimated, even if they are inherently difficult to predict. More importantly, the period was marked by a sharp and simultaneous rise in market volatility across regions and asset classes.

A Broader Market Shock

What truly defines this period is not just the equity drawdown, but the magnitude of moves across all asset classes. The chart highlights the evolution of implied volatility across major asset classes over the past five years, with all series rebased to 100 at the starting point.

In March 2026, volatility has surged simultaneously in:

US equities
US Treasuries
EUR/USD exchange rate
Commodities
Gold

Compared to five years ago (base 100), all these markets now exhibit significantly higher implied volatility levels, illustrating a rare synchronization of market volatility across traditionally uncorrelated segments.

What’s Different This Time?

The current spike in volatility recalls the 2022 shock triggered by the war in Ukraine and the ensuing inflation surge. However, this episode is more sudden and more pervasive, as markets were emerging from unusually low volatility levels—especially in rates, currencies and commodities. Geopolitical tensions, particularly those affecting energy markets and supply chains, have further intensified the move, amplifying cross-asset market volatility.

No Safe Haven

Traditionally, periods of equity market stress are partially offset by gains in defensive assets such as government bonds or gold. This time, however, these traditional hedges have failed to provide protection. Peak to trough, gold lost about 18% intramonth, while an investment in 10-year US Treasury bonds would have resulted in a loss of more than 4% over the same period.

In such environments, where diversification benefits break down, a low volatility investment strategy becomes particularly relevant, as it aims to limit drawdowns while maintaining more stable return profiles.

The Case for Diversified Hedge Funds

Yet, even in such challenging conditions, not all strategies are equally exposed. As in previous periods of market stress, diversified multi-strategy hedge funds have demonstrated their ability to navigate volatile environments.

This is precisely the approach implemented in our low volatility multi-strategy investment approach. Drawing on more than 25 years of experience, the strategy is designed to deliver steady, uncorrelated returns across market cycles.

While global equity markets are down approximately 4.0% year-to-date, the strategy remains in positive territory. Over the past five years, it has delivered an annualized return of around 5.8%, with low volatility of approximately 2.0% and no meaningful correlation to equity markets.

Some months may feel uneventful in terms of performance. But in periods like the one we’ve just experienced, capital preservation and stability become invaluable. Ultimately, managing market volatility is not only about performance, but about ensuring resilience across market regimes. Sometimes, the real luxury in investing is simple: being able to sleep at night.

Written by Cédric Dingens

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only.

NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation.

Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors.

Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.

© NS Partners Group

Beyond the wall: transforming China’s inefficiencies into alpha opportunities through equity long short investing

China continues to offer one of the richest, and most misunderstood, equity opportunity sets in global markets. Macro uncertainty, regulatory interventions, shifting policy priorities and persistent market inefficiencies have created an environment where traditional long-only investing often struggles to capture value. However, these very complexities make China a highly attractive market for long/short strategies, where differentiated insights, disciplined risk management, and active exposure adjustment can extract meaningful alpha from both winners and losers.

A macro landscape that rewards selectivity
China’s macro landscape is still in transition. Policymakers are steering the economy away from overcapacity, speculative excess, and the so-called involution dynamic, where firms compete aggressively without generating real productivity gains. Recent measures targeting property developers, exporters with razor-thin margins, and manufacturers benefiting from subsidies highlight a clear policy direction: quality over quantity.

At the same time, China is fostering strategic sectors such as AI, semiconductors, renewables, healthcare technology and high-end industrial automation. These policy signals generate strong divergence across industries. In such an environment, long/short investors can go long companies aligned with policy tailwinds while shorting those facing structural or regulatory headwinds, turning macro uncertainty into an alpha source rather than a risk.

Market inefficiencies: a structural advantage
China remains one of the world’s most inefficient major equity markets. Retail investors still account for a large portion of daily trading volumes, contributing to:

High levels of sentiment-driven volatility
Momentum overshoots
Rapid rotation between themes
Behavioral biases such as herd behavior and panic selling

These characteristics create mispricing on both sides of the market. While long-only investors suffer from these swings, long/short managers can systematically exploit them, building long positions in oversold quality names and short positions in speculative or structurally challenged companies.

A market of leaders and laggards
Despite the headlines, many Chinese companies are not only thriving, they are becoming global leaders. In advanced manufacturing, robotics, EV supply chains, battery technologies and digital services, China has produced companies with accelerating earnings, strong balance sheets and expanding competitive advantages. These belong on the long side of a portfolio.

Conversely, firms trapped in industries targeted by the government’s overcapacity crackdown, traditional manufacturing, low-margin exporters, uncompetitive commodity producers, face structural pressure. These make compelling short candidates, especially when valuations remain disconnected from fundamentals.

Strong alpha generation: what the chart shows
The attached Chart of the Month illustrates precisely this dynamic.

Over the past decade, the Chinese equity market, represented by the MSCI China Index, has delivered only modest performance. In contrast, Chinese long/short equity managers, as measured by the Eurekahedge Index, have achieved returns approximately twice as high. Moreover, through disciplined manager selection, it has been possible to enhance results even further, generating performance levels that exceed the Eurekahedge Index by a substantial margin.

Conclusion: the right strategy for the right market
China is a market where macro shifts are decisive, policy direction matters, and inefficiencies are abundant. This environment naturally favors investors who can go long the future winners and short the inevitable losers, a capability that long-only strategies simply do not possess.

As the Chinese economy continues to evolve, so too will its equity markets. The long/short approach offers a disciplined, opportunity-driven way to harness China’s growth potential while managing risks in a market that rewards agility, research depth and selective exposure. For investors seeking to participate in China’s next chapter, long/short is not only a smart approach, it is the most adaptive one.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

Active Management: Turning Euphoria into Opportunity

Active Management: a driver of growth and a source of added value, Swiss industry deserves its place in investment portfolios.

Often seen as a service-driven economy, Switzerland in fact rests on a solid and diversified industrial base. Key sectors such as pharmaceuticals, chemicals, machinery, metalworking and electricity generation make up a robust export-oriented industrial ecosystem that plays a decisive role in the country’s wealth creation. In 2024, the secondary sector made up 24.7% of GDP, an unusually high figure for a developed economy, exceeding the European Union average.

A Remarkable Trajectory, Despite a Strong Franc
The Swiss franc, long considered a traditional safe-haven asset, has strengthened versus other major global currencies. In theory, this trend should undermine export competitiveness, yet it has not hindered the momentum of Swiss industry. In fact, over the past 15 years, Swiss industrial production has shown steady growth. In Q1 2025, it rose by +8.5% year-over-year. Even more striking, industrial output has grown by nearly 40% since 2010 despite the franc strengthening by over 25% relative to the euro. What explains such performance? Much of it lies in the structure of Swiss industry itself. The absence of a large automotive sector, combined with a focus on high value-added niches, gives Swiss industry greater resilience to external shocks and the ability to export specialized goods that continue to be in high demand globally.

Active Management in Swiss Industry

Switzerland Generates Far More Value Per Exported Unit than China
While China remains the world’s largest industrial producer by volume, Switzerland stands out through its much higher value-added intensity. In 2024, Switzerland’s per capita trade surplus was nearly 12 times higher than China’s. This momentum also sets Switzerland apart within Europe. Industrial growth here has been significantly more robust than in most major European economies, including Germany.

U.S. Trade Policy: Ongoing Uncertainty
In 2025, one of the key external risks remains the trade policy of the United States. Tariff measures announced by Donald Trump prompted many companies to bring forward deliveries into Q1, contributing to GDP growth for the period. In response to this uncertain climate, Swiss companies are adopting various adaptation strategies: price adjustments, partial reshoring of value chains, and geographic diversification, even as hopes persist for a bilateral agreement. Diplomatic pressure is mounting and drawing firm conclusions in such a fluid environment remains risky. However, Switzerland’s focus on differentiated products suggests the country will continue to adapt effectively.

A Strategic Long-Term Positioning
Despite international economic uncertainty, Swiss industry, driven by niche leaders, a culture of constant innovation and a highly skilled workforce makes a strong case for long-term strategic exposure in investment portfolios. Whether facing a strong franc or trade tensions with the U.S., Swiss firms are quick to adapt. Even in a context of global slowdown, Switzerland continues to maintain a healthy trade surplus. This reflects the structural resilience of its industrial model.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Time to perform differently – Global Macro

Time to perform differently: Global macro

Markets are shifting, and fast. Since late 2024, volatility’s up and equities are struggling. But global macro strategies? They’re thriving. Same returns, less risk. Half the volatility, negative correlation, and real resilience. At Haussmann, we now allocate over 25% to macro. Why? Because when markets get unstable, macro performs. It’s time to think differently and perform differently.

Cédric Dingens, Head of Alternative Investments

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

Chart of the month: Time to perform differently – Global Macro

Time to perform differently: Global macro

Source: NS Partners, Bloomberg

In our previous “Chart of the Month” from September 2024, titled “Time to Reassess Market Risks,” we noted early signs of fragility in global market structures. Since then, markets have trended lower and become more volatile, driven primarily by Trump’s trade war and persistent geopolitical tensions.

By late 2024, one of our strongest convictions was the growing attractiveness of global macro strategies. These managers generate returns by identifying broad economic and political trends, such as shifts in interest rates, inflation, currency dynamics or global risk factors, and positioning portfolios accordingly across a diverse set of asset classes, including equities, bonds, currencies and commodities.

The accompanying chart highlights the performance and volatility of our global macro managers in Haussmann versus the MSCI World Index since 2020. While the equity market returned an impressive +55% over that period, our macro managers delivered comparable performance, with far greater resilience.

Crucially, the rolling volatility of the global macro strategy was roughly half that of equity markets and significantly more stable. Whereas market volatility peaked near 30%, macro volatility rarely exceeded 10%. From a portfolio construction standpoint, this is compelling: the strategy’s correlation to equities was only 0.18 and its downside capture was -7%, meaning it generally performed positively during equity market drawdowns.

Today, global macro represents more than 25% of Haussmann’s capital allocation. We take confidence in the long-standing strength of our top three macro allocations: Caxton, Castle Hook and Gemsstock which have been part of our portfolio for many years.

We are now operating in a market environment that is increasingly macro-driven. Trade tensions and tariff-related uncertainty continue to suppress risk appetite and heighten volatility. While we are not advocating an exit from equities, positive surprises remain possible, we strongly believe this is the time to complement portfolios with strategies that offer greater resilience and positive convexity.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

Chart of the Month – Time to reassess market risks

Time to reassess market risks

The surge in stock market volatility in August serves as a reminder that markets may be more fragile and nervous than they appear on the surface.

During this period, the VIX index, which measures the implied volatility for the S&P 500 index spiked above the 65 level. This marked the third-highest peak in its history surpassed only by the collapse of Lehman Brothers in October 2008 and the COVID-19 pandemic outbreak in March 2020. However, the circumstances of early August were far less severe than those historic crises. So, what drove such extreme market behavior?

When we witness such dramatic volatility, it’s rarely attributable to a single factor. The initial catalyst in this case was a release of US employment data that significantly undershot expectations, reigniting fears of a deeper economic slowdown in the United States. This led to a sharp decline in equity markets and a corresponding rise in the VIX, though the movement at this stage was not yet alarming. Almost simultaneously, the Bank of Japan announced a 15bps rate hike, exceeding market expectations. Both news combined triggered one of the most intense carry trade unwinding in history.

As we can see on the chart, the Nikkei index literally plunged, and the Yen surged. The S&P 500 index also corrected significantly but the VIX index spiked far more in comparison to the spot price.

The market is far more nervous than at the beginning of the year. It is clear that developed market central banks – at the exception of Japan – will cut rates to face a sharper economic slowdown but the market’s depth has been reduced.

Key considerations moving forward include:

NVIDIA’s Growth Trajectory: NVIDIA’s exponential rise may continue to satisfy the gigantic CAPEX from the US Tech giants, but the probability of disappointing investors is also higher now.
India’s Valuations: India is seeing its promising growth confirmed, but it’s also reasonable to think that the valuation of a lot of Indian stocks has become excessive.
Geopolitical Risks: Geopolitical tensions may be on the downside in the near future, but nothing is certain, and the current risk premium does not seem particularly high.

This volatility spike highlights how technical factors can sometimes drive markets to the detriment of fundamentals. This end-of-summer period seems to be appropriate to reassess the risks we are willing to be exposed to in our portfolios and to adopt a diversified approach in terms of asset allocation.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

A shock of volatility to raise the right questions

While the consequences of the mini-crash at the beginning of August were not too serious, it should serve as a wake-up call.

Signs of tension

During the first week of August, the financial markets experienced an episode of unprecedented volatility, reminding everyone that investors were no longer necessarily in a serene mood. During this episode, the VIX index, which measures volatility and hence tension in the S&P 500 index, reached a level of over 65, which is quite simply the 3^rd highest peak in its history. For he record, the two most severe peaks before that were the collapse of Lehman Brothers in 2008 and the materialisation of the scale of the COVID pandemic in 2020. I’m sure you’ll agree that this beginning of August had nothing in common with those two historic moments. So what happened?

Some complacency on the markets

As with any phenomenon of exceptional magnitude, there is never just one factor that explains it. The first phase of the crisis corresponded to the announcement of worse-than-expected US employment results. Fears of a marked slowdown in US growth were suddenly reawakened. As a result, the equity markets reacted negatively and the VIX rose, although nothing really dramatic until then. However, at the same time, the Japanese central bank announced that it was raising its key rates by 15bps, 5bps more than the market was expecting. The almost simultaneous combination of the two pieces of news had a scissor effect, with many JPY/USD carry trade positions being sold off in a hurry. It became clear that many speculators were borrowing in JPY at rates close to 0% in order to invest in USD assets, in the knowledge that short-term ‘risk-free’ US rates were in excess of 5%. This is an unfortunate reminder of the trend in the 2000s to borrow CHF mortgages to invest in EUR property, with the result that we are all familiar with.

The snowball effect

It’s at times like these that a good understanding of market structure can be essential. Many players, notably investment banks but also funds, are once again shorting volatility. After the VIX surged, they had to react quickly to cover their positions and rebalance their books. And they did so simultaneously, because they were all moving in the same direction, against a backdrop of low liquidity for the beginning of August. You know the rest of the story: the VIX reached these particularly high levels. Fortunately for these traders, the markets came to their senses and things normalised quickly enough not to trigger any a priori disasters. To date, the JPY/USD carry trade positions have largely been sold off.

What lessons can we learn from this?

This episode highlights the way in which events can unfold in some market configurations. Technical factors can run ahead of fundamentals, which is why good risk management is more essential than ever when it comes to investing. Another consequence is that the market looks more ‘fragile’ than it did at the beginning of the year. Clearly, central banks are not going to hesitate to cut rates to counter a more marked economic slowdown, while hoping that inflation is at an acceptable level, but the depth of the market has been reduced. Yes, NVIDIA can continue its meteoric rise by trying to meet the huge CAPEX requirements of the US tech giants, but the market is likely to be disappointed. Yes, India is seeing its promising growth confirmed, but it is also reasonable to think that the valuation of Indian small/mid-caps has become excessive. Yes, geopolitical risks may diminish in intensity in the near future, but unfortunately nothing is less certain and the associated risk premium does not seem particularly high to me.

To sum up, this end of summer seems to be a good time to ask ourselves what type of risk we want in our portfolios and to favour a diversified approach in terms of asset allocation.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Hedge funds: what positioning for 2024?

Preference for macro, equity and credit long/short strategies, but caution on multi-manager platforms.

A MIXED 2023

While equities enjoyed a positive start to 2023, hedge funds got off to a more mixed start. Indeed, following fears of a global economic slowdown, long/short equity managers started the year on a cautious note, maintaining a rather low net exposure to the market. For their part, global macro managers were hit by sharp reversals in trends, highlighted by the record fall in US 10-year yields following the regional banking crisis in the United States and the collapse of Credit Suisse.

Finally, after a remarkable 2022, relative value strategies, now dominated by the large multi-manager platforms, also stalled and were unable to keep pace with the rise in risk-free rates, which is their minimum target. But in the end – and it is true that the last two months of the year were particularly favourable – a diversified hedge fund portfolio was able to post a double-digit net return in 2023.

WHAT CAN WE EXPECT FROM 2024 AT MACRO LEVEL?

What about 2024? We are currently at a crossroads in terms of monetary policy. In fact, with the exception of Japan, the major central banks are now prepared, in the more or less short term, to lower their interest rates depending on the trend in inflation and economic growth. For their part, although the opinions of macro managers vary considerably, they generally agree that the market is hoping for a faster rate cut in the United States than might actually occur. With interest-rate volatility higher than that of equities, managers have reduced their risk allocations.

Certain themes, which did not always pay off in 2023, are still present in portfolios, such as bets on metals linked to the energy transition, particularly copper, on the normalisation of Japanese monetary policy and on long positions in certain emerging markets (Brazilian interest rates, Mexico, credit). After a year of contrasting results in 2023, macro managers should be well positioned to take advantage of volatility on the fixed-income, currency and commodities markets.

A STABILISED ENVIRONMENT FOR LONG/SHORT EQUITY MANAGERS

The ‘soft landing’ scenario that seems to be holding sway is giving a little more peace of mind to long/short equity managers, who have significantly increased their net exposure to the market in recent months. But make no mistake: good global long/short managers have posted returns of between +15% and +20% in 2023 – compared with an MSCI World index up by +21.8% – which constitutes positive alpha generation, firstly because of their exposure to the market of only around +60% and secondly because of their underweighting of the seven technology megastocks that have driven the market. Even Asian managers with a bias towards China posted positive returns over the past year, while the MSCI China index fell by -13.2% in 2023.

On the other hand, if there is one strategy that shows a little more cyclicality, it is the long/short equity strategy. At this stage, we believe that we are still in a cycle of rising alpha generation. What’s more, with the normalisation of interest rates and the fact that we are finally being paid to short stocks, we believe that a selection of good long/short managers is a good complement to an equity allocation in a portfolio. Perhaps it’s time to diversify your geographical allocation a little outside the US.

QUESTIONS ABOUT MULTI-MANAGER PLATFORMS

Multi-manager platforms have been the big winners in recent years. Since 2017, their assets under management have increased by +186% and the seven largest platforms, including Citadel, Millennium, Point 72 and Balyasny, now account for over 60% of the market share in this category. The asset class approaches and exposures vary from one company to another, so it is not always easy to compare them. That said, they are now waging a merciless war to attract the best traders, who are paid handsomely, which has an impact on costs.

In these platforms, a successful manager can receive performance fees even if the overall result is zero or even negative, which translates into what is known as ‘netting risk’. This risk can materialise more quickly if the performance of the funds falls short of expectations. For platforms that have experienced rapid growth, it will be necessary to digest the assets and assess whether there is any dilution of the added value in the final result. In addition, with liquidity requirements having become more restrictive, we now have to be very selective.

Finally, to conclude our overview of the positioning to adopt in 2024, we believe that good long/short credit managers should be able to generate attractive returns in the market environment that awaits us over the next few months.

In conclusion, the key to obtaining a satisfactory result from your hedge fund portfolio is to define your expectations clearly, as the construction and development of your portfolio will depend directly on this. To be successful, however, you need to bear in mind two important factors: firstly, you need to make a good selection beforehand, and secondly, you need to be as contrarian as possible.

Chart of the Month – The game changer

October saw further deterioration in market sentiment with rising geopolitical tensions. Another concern was the rising US debt supply, pushing long-term yields above 5%. Last month, the MSCI World Index was down 3.0% and since the peak in July, global equity markets lost 9.7%.

Despite this recent correction, markets are still up for the year. A resilient economy, especially in the US, surprised many investors and made the soft-landing scenario the most likely one. Overall, corporate earnings have been strong. Nevertheless, looking behind the surface, the situation looks potentially more challenging. The MSCI World equally weighted index is down 1.8% this year. Investors are realizing that rates could remain higher for longer.

This chart shows the evolution of the US 10-year bond yield since 1990. We had a great bull market for more than 30 years and the 10Y went down from 9% to less than 1% when the COVID pandemic hit. Following the huge liquidity injections made by central banks, inflation started to rise in 2021 and central banks started to raise rates again. The cost of capital increased significantly over the last 18 months. Since then, market participants have tried to adapt to this new reality but the impact on economies and corporates is just starting to be felt.

What could we expect from hedge funds in this context?

Short-term, long/short equity managers are defensively positioned and making money on shorts and global macro managers are up playing the steepening of the yield curve.
Longer-term, looking at the chart, historical data shows that hedge fund managers perform best in higher interest rate regimes. During the period between 1990 and 2007, when rates were above 4%, hedge funds outperformed markets by 3.2% on average if we consider the HFRI FoHF Composite index. Our selection of hedge funds even outperformed markets by 6.4%. Since 2008 and the GFC, rates have remained below 4% and hedge funds underperformed markets. Our selection of hedge funds underperformed markets by 2% even if the result is clearly better on a risk-adjusted basis.

The situation has changed and the 10Y, which recently reached 5%, could remain above 4% for some time. Inflation is likely to remain higher and huge deficits are expected going forward with the combination of deglobalization, energy transition, the US election and lack of buyers.

Hedge fund returns are a function of dispersion in equity markets, and higher rates help separate the winners from the losers. In addition, short-term zero rates had neutralized one of the key sources of returns for the strategy. Today with 5% rates, just because of keeping a relevant short book, a manager can basically pay for its own fees with interest gained on its shorts. Finally higher macro and market volatility, creates an environment rich with opportunities for active trading.

A hedge fund allocation on your client’s portfolio makes sense in this current investment régime.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

Winning hedge fund strategies for 2023

At a time when market calm seems precarious, which alternative strategies should we choose to avoid the storm?

Apparent calm

Looking at the performance of equity indices since the start of the year, the financial markets are in good shape overall. The MSCI World index is up by 13%, the S&P 500 by 15%, the MSCI Europe by 10% and the SMI by 7%. In Asia, the picture is more mixed. Indeed, while the Topix rallied, posting a +23% rise, China was in more difficulty, with the MSCI China index down -6%. Meanwhile, after a complicated year in 2022 marked by a major rise in interest rates, bond indices are in the green. Despite a significant restriction in liquidity conditions, a level of financing costs for governments and companies not seen for 15 years, and a banking crisis that is not all that insignificant, credit spreads have not widened… for the time being.

Long/short equity: a positioning that could pay off

Against this backdrop, which hedge fund strategies have come out on top? While long/short equity managers did a particularly poor job of managing 2022, failing to return to positive territory after their first-quarter decline, in 2023 they once again posted performances more in line with their objectives. After declining by 10% in 2022, the HFRI Equity Hedge index is up by 3% this year, with many managers posting gains of around 6%. The situation is therefore quite different, insofar as the managers have more diversified positions in terms of sector allocation and rather low exposure to the markets overall. This result is all the more interesting given that the US market is driven by a handful of AI-related technology mega-companies, which mask a much more mixed underlying reality. This positioning gives us a little more peace of mind should the equity market lose colour over the summer. Slightly underperforming market indices is the price to pay for not having to worry about having to sell or trying to make up for lost time.

Competition rages among multi-manager platforms

In the search for an alternative to the bond pocket, relative value multi-strategy funds were last year’s big winners. The HFRI sub-index of Relative Value Multi-Strategy funds fell by ‘only’ -1% in 2022 (with a good proportion of managers generating a performance of around +5%) and climbed by +2% over the current year. Demonstrating unfailing robustness, they have achieved a Sharpe ratio that would make the famous 60% equities/40% bonds composite pale into insignificance over the last 3 years. As a result, these platforms have attracted a lot of money and are waging a merciless war for talent, which is not without impact on the fees paid by investors. However, while still positive, this year’s performance has so far fallen short of expectations, probably reflecting a digestion phase. Despite this, the rise in interest rates has meant that medium-term performance expectations have also been revised upwards. It has to be said that this category of managers probably represents the best insurance against exogenous shocks or a sudden rise in volatility. However, it is still necessary to find the smaller funds capable of generating attractive alpha or to gain access to the best platforms, whose investment minimums have risen sharply.

Global Macro: risks that pay off

Although global macro managers were the big stars of 2022 (+9% for the HFRI Macro sub-index), they have suffered since the start of the year (-2%), which is not necessarily a surprise given the massive downturn we have seen. The most striking phenomenon occurred in March with the bank failures in the United States, which caused the US 2-year yield to fall from 5.2% to 3.8% in the space of 48 hours, a movement of a magnitude not seen since 1987. And all the while, the equity market didn’t even raise an eyebrow! In this category, one of the most emblematic managers is probably Chris Rokos, who received a lot of media coverage for his fall of almost 15% in March. But when you take risks, this kind of drawdown cannot be avoided from time to time. Above all, it should be noted that the fund is in the process of returning to positive territory, having generated a return of 51% for its investors last year. In this uncertain market environment, we remain convinced that global macro managers represent a very attractive investment proposition. Among the themes that have caught our attention recently is the possibility of China’s economic stagnation. While everyone is looking up, it may well be looking down that we should be looking at.

To sum up, we believe that it is now appropriate to consider the 3 main categories of hedge fund strategies: equity long/short, multi-strategy relative value and global macro. But the predominant factor in obtaining satisfactory performance from your hedge fund portfolio is selection and access to the best managers. Another variable that is often overlooked is dynamic portfolio management. So, wherever possible, it often pays to take a contrarian approach and not hesitate to take profits when a manager has performed very well and, above all, not be afraid to add money to a manager who has had a blip. If the selection work upstream has been good, that’s what will enable you to make the difference.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.