In response to current deflationary pressures in the Eurozone, the European Central Bank (ECB) announced on 22 January 2015 a €1.1tn quantitative easing (QE) program. From March this year, a mass bond buy-back program at the rate of €60bn a month will be put into place by the ECB in an attempt to stimulate the Eurozone economy. The program was much larger than investors had expected, with European stock markets rallying in response, rising to a six-year high. The resulting increase in market volatility has cultivated a favourable environment for hedge funds, and especially for Europe-focused managers, to push returns in January into positive territory.
The chart below illustrates that equity strategies with a focus on Europe strongly outperformed all other major regions tracked by Preqin’s Hedge Fund Analyst online service in January 2015, posting 1.34% for the month. In contrast, despite the strength of the Euro/US Dollar currency pairing, the major US share indices were all down, resulting in a spread of 980 basis points between the S&P 500 (-3.10%) and the Eurostoxx 50 (+6.70%) at the end of January, the widest spread recorded since 2000.
The Preqin Equity Strategies Europe benchmark has returned just 2.54% in the past six months, comparing unfavourably to the Preqin Equity Strategies Developed Markets benchmark, which posted 8.38% for the same time period. January 2015’s return of 1.34% represents the best recorded performance in 11 months for the Preqin Equity Strategies Europe benchmark (with the exception of +1.37% in November 2014) with six of those months generating negative returns. In the context of this recent mixed performance record, the strength of the January return (+1.34%) represents a significant change of fortune for this geographic area and for Europe-focused equity hedge fund investors.
Managers and funds tracked by Preqin’s Hedge Fund Analyst have cited the QE decision as a specific driver behind positive January performance. Martin Currie, and its European Absolute Alpha UCITS fund, reduced its short positions in light of ECB QE activity, capturing most of the upside offered in Europe throughout January – the fund posted 3.00% for the month. Argos European Systematic Long-Short Equity Fund, managed by Argos Investment Managers, returned 6.00% net for January for the A (acc) EUR share class, citing the QE decision as a key factor in the positive return delivered by its top performing position.
Similar QE strategies implemented by the Bank of England and the US Federal Reserve in 2009 helped contribute to a six-year equity bull market; however, the Eurozone remains a different entity with the ECB only responsible for 20% of purchases, with the rest in the hands of national central banks. The initial positive reaction to the program will have encouraged investors and pleased officials, but whether the growth of the Eurozone market will continue throughout the QE process, or even reach the levels of the UK or U.S programs, is still unclear.