The devil’s advocate

Markets were further galvanised this week following more positive news in the ongoing hunt for a Covid-19 vaccine.

But rising coronavirus cases on both sides of the Atlantic – coupled with continued uncertainty over restrictions during the approaching holiday season, and the logistics of a mass vaccine rollout next year – may pose more questions than answers for those hoping to trade on the recent breakthrough, particularly in light of this week’s seismic market moves.

It was earlier reported that Oxford University’s treatment, developed alongside AstraZeneca, may offer a decent immune response among the over-60s, a group particularly vulnerable to coronavirus.  That announcement followed recent progress in separate trials run by Pfizer-BioNTech and Moderna, which suggested that some 95 per cent of over-65s could be protected from Covid-19.

Global equities duly surged, with the S&P 500 and Dow Jones edging towards record closing highs on Monday.  Value, cyclical and small cap names all outflanked wider markets earlier in the week. Certain travel names – battered and bruised for much of 2020 thanks to tougher international travel restrictions – rose almost 10 per cent at one point. 

In turn, some hedge fund strategy types reportedly saw many of their contrarian bets come unstuck amid the sizeable market rotations from momentum names towards value stocks. New data from Lyxor Asset Management suggests CTAs and market neutral long/short equity managers suffered the biggest squeeze.

On the flipside, some hedge funds betting on energy stocks – another sector pummelled by the coronavirus – have been lifted by the news, and are already recouping some of last month’s losses in the early part of November.

All of which serves as a timely reminder that, as we approach the light at the end of the tunnel in terms of the pandemic, markets can nevertheless still turn on a dime, bringing sharp rotations and rapid spikes in volatility. For hedge funds, an industry never shy to play devil’s advocate and take the bearish side of the bet, it’s a particularly live risk.

Or, as one speaker at last week’s Hedgeweek LIVE Europe summit would have it, such black swan events are “more like the new normal”.

Hugh Leask
Editor, Hedgeweek
 

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