Capital Commentary is a quarterly view of the equities, fixed income and hedge fund markets from our Family Management specialists.
Hedge funds finished the first half of the year higher, with the HFRI Fund-of-Funds Composite Index rising an additional 0.9% in 2Q. The alternative sector benefited from continued global trade-war jitters which increased volatility across the markets. Specifically, ‘Event Driven’ and ‘Relative Value’ strategies were some of the best performers, with the HFRI Event Driven Index and HFRI Relative Value Index increasing 2.3% and 1.2%, respectively, during 2Q. FMC’s Event Driven and Relative Value managers posted strong returns during the quarter as they all outperformed their respective HFRI benchmarks. We believe our managers will continue to produce positive uncorrelated returns in the current market environment.
Fixed income markets settled down in the second quarter compared to the first quarter of 2018 where short and intermediate term rates rose between 35 and 50 basis points. During 2Q, the 5- and 10-year treasury yield peaked at 2.93% and 3.11% respectively in mid-May, before ending the quarter at 2.73% and 2.86%. Expectations for the pace of rate hikes have subsided somewhat, although the market is still pricing in an additional 1-2 hikes for the remainder of 2018.
Overall, the equity markets had a solid second quarter in 2018. The S&P 500 rose 3.55%, the Nasdaq 6.61% and the Dow 1.04%. However, when one looks more closely at the underlying holdings, a different picture emerges. While the so-called “FANG” stocks – Facebook, Apple, Netflix, and Google – have risen over 25% year to date, the rest of the S&P 500 experienced a negative return. Likewise, the S&P 500 Growth Index rose 7.1% through the second quarter, while the S&P Value Index fell 2.2%. Indeed, five out of the eleven sectors of the S&P 500 (Industrials, Consumer Staples, Financials, Telecom, and Materials) had negative total returns through the end of the second quarter.