Strategic Heat Map by Ketterra - November 2021 Edition
In the final days of November 2021, global equities took a nose dive after many had hit all-time highs earlier in the month. The sudden sell-off was triggered by the emergence of the Omicron COVID-19 variant, causing significant uncertainty and volatility across various systematic trend strategies, industrial and agricultural commodities, FX markets, and hedge fund performances.
Impacts on Systematic Trend Strategies
The news of Omicron led to a spike in market volatility and risk reassessment. Treasury yields initially dropped sharply but then rose somewhat as markets digested the potential economic impact of the variant. This volatility shock led to rapid shifts in trend-following strategies, which typically respond to heightened market moves with reallocations. Although specific performance figures for systematic strategies are not detailed, such environments usually cause short-term disruptions and increase hedge fund hedge costs.
Industrial Commodities
Oil prices were notably affected. Initially, Brent crude oil prices fell sharply due to fears around Omicron's economic impact but later rebounded by nearly 5%, driven partly by expectations around OPEC policies and supply adjustments. The Colombian peso, closely linked to Brent crude, exhibited mixed performance reflecting the volatility in oil.
Agricultural Commodities
While direct effects on agricultural commodities from Omicron are not explicitly detailed, the variant heightened concerns about supply chain disruptions and potential price increases for imports, especially from China. The Richmond Fed's indication of persistent supply strain due to COVID-19 variants suggests agricultural commodity supply chains might have been disrupted, potentially leading to price volatility.
FX Strategies
Currency markets reacted with mixed results. The Colombian peso's outlook was described as mixed, influenced by the renewed risk sentiment and oil price volatility following Omicron’s news. Global currencies likely experienced fluctuations as investors moved funds toward perceived safe havens or risk assets based on evolving outlooks.
Hedge Fund Performances
Hedge funds, particularly those engaging in systematic strategies, faced inflation of volatility and re-positioning as markets reacted to Omicron uncertainties. The increased risk aversion caused hedging costs to rise, and sentiment shifts affected fund returns. While some hedge funds might have benefited from volatility spikes, uncertainty likely increased performance dispersion across funds.
In summary, the Omicron news introduced heightened uncertainty causing rapid shifts in market sentiment. Oil prices dropped initially but quickly rebounded, influencing industrial commodity markets and FX tied to such commodities. Supply chain concerns raised risks for agricultural commodity markets. Systematic trend strategies and hedge funds faced increased volatility and risk reassessment, affecting performance and positioning. Treasury yields and bond markets also experienced volatility amid reassessments of economic impact.
These dynamics contributed to a period of elevated market volatility and cautious investor positioning through November 2021. As we move forward, it appears that most ag specialists now appear to be skeptical of Omicron's impact and intend to return to their bullish stances. Metals traders were generally down on the month, while energy specialists were either long outright or more commonly, held long-biased relative value spreads. The BarclayHedge Discretionary Traders Index, Barclay Ag Traders Index, and NilssonHedge Commodities CTA Index are among the indices that were affected. The CBOE Eurekahedge Relative Value Volatility Hedge Fund Index is also worth noting.
Some natural gas traders avoided the petroleum carnage and profited substantially by only focusing on short exposure to North American natural gas markets. The Barclay Crypto Traders Index and the Eurekahedge AI Hedge Fund Index were also impacted. While FX managers, in the aggregate, had one of the best months in some time, there was a large variance in returns among programs. Longer-term systematic trend strategies were generally long equities, commodities, and short Fixed Income, but these positions were hit hard following Moderna CEO's comments on the ineffectiveness of Covid vaccines on the new Omicron variant. The most popular position appeared to be long USD / short euro. Long Crude positions hurt the most across the LTTF managers followed. Short Fixed Income positions hit some programs badly as the world went "risk-off" in a hurry. Those managers that maintained a substantive long position in the US Dollar against the currencies of emerging market and commodities-based countries fared the best. Model-based and systematic currency specialists seemed to have an edge in November, versus their discretionary brethren. The grain markets spent most of the month in an uptrend, but corrected on the last week of the month due to negative news about the new Omicron Covid variant.
- Systematic trend strategies experienced short-term disruptions and an increase in hedge fund hedge costs due to the heightened volatility caused by the Omicron variant, leading to rapid shifts in the strategies' positioning.
- Hedge funds that engage in systematic strategies faced inflation of volatility and re-positioning, as markets reacted to uncertainties surrounding the Omicron variant, causing increases in risk aversion and hedging costs, and affecting fund returns.
