Monday Market Minute | Jun 17, 2019
Canadian hedge fund managers adjust strategies as prolonged low volatility compresses alpha generation. Liquid alternatives face performance headwinds.
What Moved
Mid-year performance data from Canadian hedge fund managers revealed a challenging environment for traditional liquid alternative strategies. Despite the S&P/TSX Composite rising roughly 15% year-to-date, long-short equity managers underperformed as low dispersion between winners and losers compressed alpha opportunities. Market-neutral and relative value strategies struggled in an environment where central bank dovishness suppressed volatility across asset classes.
Why It Matters
The performance gap between liquid and illiquid alternatives continued to widen in 2019. While hedge funds navigated compressed spreads and low volatility, private credit and PE strategies benefited from structural market dislocations. For allocators constructing alternative portfolios, the data reinforced the case for illiquidity premiums — accepting lower liquidity in exchange for higher, more predictable returns was delivering tangible results in 2019.
Signal to Watch
The upcoming Fed decision on June 19 had the potential to inject volatility if the committee signaled a rate cut. For Canadian hedge fund managers, a shift in global rate expectations could reopen trading opportunities in rates, currencies, and credit that had been dormant for months.