Markets remained volatile during the month of March. The primary concern isn’t the weakening economic fundamentals, but rather investors’ doubts about the credibility and stability of the U.S. Administration’s economic policies. The sense of chaos around the first weeks of Donald Trump’s agenda elevated market’s uncertainty to levels not seen since the COVID crisis.
Most major equity markets ended the month in negative territory. Taiwan and US equities underperformed as investors found it difficult to hold stocks with high multiple in this context of economic uncertainty. Chinese equities outperformed due to attractive valuations and a renewed interest in the technology sector. Unsurprisingly, defensive sectors such as utilities outperformed cyclicals over the period.
After US long-term sovereign yields rallied in February, they have navigated in a relatively tight range during the month. Euro rates were more volatile. Long-term sovereign yields started by moving up by around 50 basis points following Germany’s announcement of a major investment plan in infrastructure. They then progressively fell by 30 basis points as confidence in the economy’s health declined.
The HFRX Global Hedge Fund EUR returned -0.86% over the month.
March was a challenging month for Long-Short Equity strategies, as market dispersion significantly narrowed due to indiscriminate selling. This environment made it difficult for stock pickers to generate alpha, with correlations rising and fundamentals taking a back seat to broad-based risk-off sentiment. Strategies were affected by the continuation of momentum reversal, growing economic uncertainty and significant deleveraging by multi-manager platforms. Dispersion was across types of strategies and regions. Long-Short Equity fundamental growth and directional strategies underperformed low-net and market-neutral Long-Short Equity strategies. Also, US-focused strategies lagged strategies investing in Europe and Asia. According to several Prime Brokers, average US Long-Short Equity strategies are slightly down year to date, while average performance for Europe and Asia Long-Short strategies are close to positive mid-single returns. Since late January 2025, investment visibility was substantially reduced leading managers to reduce their gross and net exposure. Well-diversified capital allocations to Long-Short Equity strategies have proven to be resilient during market drawdowns and able to generate strong risk-adjusted returns over time. In a world of sustained uncertainty and diverging economic performance, Long-Short Equities are able to extract alpha from increasing market dispersion.
Global Macro strategies generated slightly positive average performances over the period. However, dispersion was high due to the large number of moving parts in the market. The best performers tended to be agile traders with a bearish stance on the “America First” agenda implications. They were positioned short US equities, short the US dollar, and long precious metals.
The ability to navigate markets has been challenged by the hyperactivity of the new Trump Administration, which has driven heightened volatility across asset classes. At the same time, this volatility has been a significant source of opportunity. The economic decoupling of major regional powerhouses has accelerated since the beginning of the year, offering attractive opportunities for macro managers to deploy capital and generate strong returns.
However, caution is warranted over short time horizons due to the unpredictability of the US administration’s policy agenda.
Quantitative strategies demonstrated resilience in challenging market conditions. On average, they have outperformed non-systematic strategies over the period. Multi-Strategy Quantitative strategies have outperformed during the period generating on average positive low single-digit returns. Statistical Equity Arbitrage strategies were strong contributors to performance. Since the start year, Quantitative Strategies have been among the best performers in a context of higher uncertainty and rising volatility.
After months of uncertainty surrounding inflation persistence and economic strength, the US bond market has switched to defence mode amid growing tariff uncertainties. Ten-year Treasuries rallied by 20 basis points, while Bunds and Japanese JGBs were driven by their own domestic dynamics. These market movements favoured cross-country trades (e.g., long US, short Japan or long US, short Europe), while basis trading more or less benefited from reverse trading flows. This environment has been supportive for the fixed-income space, both in terms of relative value and directional strategies.
Event-Driven performances during the month were resilient but relatively muted. On average, merger arbitrage and portfolio hedges contributed positively to returns while special situations books were small detractors. In the current market environment, managers shift to defence mode, reducing risk and refocusing their portfolios in their higher conviction positions. Some had alpha shorting the deal spreads of mergers that could be at risk. Early year predictions of a rich opportunity set for mergers has not yet materialised for obvious reasons. Deal volumes are below expectations and decelerating. On the other side, merger spreads are richer. Policy-driven uncertainty will have to cool off before having a better understanding of the opportunity set for the remainder of 2025.
Since the start of the year, equity markets pick up in volatility has not yet passed on to credit markets. High-Yield corporate credit spreads moved higher 50 to 70 basis points during the month reflecting the accrued risks for the corporate world of deteriorating economic fundamentals. Prior to the hard tariff disclosures, managers were relatively constructive regarding the credit market. Future positioning and opportunity set will depend on the US Administration’s policy decisions and the next quarters of hard data. One of the market’s current weak spots seems to be the leverage loan market. Over the last 12 months, the number of US High Yield Bond issuers being upgraded is 20% higher than those being downgraded. For US loan issuers, upgrades are 40% lower than downgrades. Also, according to the JP Morgan Default Monitor, over the last 12 months, the percentage of loan defaults including liability management exercises has reached 3.9% which is treble the level of high yield defaults of the same period.
Corporate credit spreads have widened upon increased levels of uncertainty, but they will probably move higher if the fears of economic recession materialise. Managers have concentrated their portfolio into their highest fundamental convictions, increased the level of hedges and lowered strategy directionality. On the other side, such a rich market generates numerous opportunities for alpha shorts. Absolute return or hedged investment approaches have gained more relevance with the increase of idiosyncratic risks and geopolitical uncertainty. Risk diversification is important and should be an integral part of the investment allocation process.
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