Capital Commentary is a quarterly view of the equities, fixed income and hedge fund markets from our Family Management specialists.
Hedge funds closed the year on a positive note as the HFRI Fund-of-Funds Composite Index increased by 0.9% in 4Q and 7.7% for 2017 – the best calendar year performance since 2013. FMC’s alternative funds likewise performed well, particularly in the equity hedged, event driven and long-biased space.
During 4Q, short term interest rates rose while longer maturity rates fell. The two-year U.S. Treasury yield rose from 1.48% at the end of 3Q to 1.91% at year end. Meanwhile, the 30 year U.S. Treasury yield fell from 2.86% to 2.74%. This “flattening” of the yield curve has confounded many market participants as their expectations were that longer term yields would rise in unison with the Federal Reserve’s continued hiking of overnight rates. Quite the opposite has occurred with longer rates falling due to lower than expected inflation and a high global demand for fixed income assets.
U.S. equity markets continued their impressive performance in the fourth quarter 2017 (“4Q”) with the S&P 500 and NASDAQ Composite both charging ahead. The gains in stocks have come against a seemingly constant wall of worry where investors, whose memories still look back to the financial crisis, fret over issues such as higher than normal valuations, political dysfunction and potential nuclear conflict. Despite these concerns, overall volatility has remained historically low and equity gains persisted oblivious to investor jitters.