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The post Financial Crisis has been an unusual periods especially when measured by factor excess returns. Simply put, there were no traditional factor returns as measured by the classic Fama-French factors. A comparison across decades show that factor returns are variable but generally positive and average from 6+ percent to just under 14 percent. The average excess returns for Fama-French factors since 2010 have been less than 1 percent. If you tried to make money playing these risk factors you got paid nothing. Since factor investing is the bread and butter of equity hedge funds, this is a clear indication why hedge fund investing has under-performed or disappointed many investors over the last few years. Forget about alpha decay, there has been limited return from investing in risk factors.

Fidelity Investments as come out with their long-term secular global growth prospects and it sobering tale of lower growth. (See Secular Outlook for Growth: The Next 20 Years.) With few exceptions, the growth for each of the countries studied will be lower. The exceptions are based on catch-up, the idea that very low productivity countries will increase productivity as they move closer to the rest of the world. These forecasts are not based on any exogenous events that will cause economic growth disruptions. They are only focused on demographics and productivity. Populations will be aging, growth rates will be slowing, and productivity is not expected to see any increases over current trends.

We have written about the surprising lack of gold price gains with the surge in inflation. A reader has commented that it is the real rate of interest that is important, not inflation. Unfortunately, the data does not seem to show a close relationship.

You would not think some hedge funds would be down so significantly for September returns given that the major stock index (SPX) moved higher, but upheaval in small cap, value and growth harmed the average equity hedge fund. There were some positive gains in relative value managers, but it was a generally a tough month for those trying to actively find returns.

There is a large return gap in equities. The US and the rest of the world are living in two parallel equity investment universes. For the US, strong economic growth, loose monetary policy even with the current tightening, and pro-cyclical fiscal policies have proved to be a successful investment elixir. The rest of the world is facing slower growth, debt without gains, and an environment that has been filled with uncertainty. We are not arguing that the differential is unjustified. However, we are surprised by the length and size of the gap given the interconnectedness across markets especially in the developed world. This is not the equity diversification that investors expected or desired.

Managed futures, as measured by the SocGen CTA index, showed a slight decline in return for the month, but this performance within the range of most asset classes with the exception of equities. Being long market beta is still king for the year with little absolute performance value from diversification. 

September was a slightly down return month for many trend-followers as the first half of the month was range bound. Our sector indicators showed most markets not having clear trends with only some slight directional tilts. During the month, the markets became more directional for bonds, rates and energy. The price action in these markets aligned with economic fundamentals. A combination of continued good economic news, higher inflation, and another Fed increase all point to negative fixed income markets not just in the US but across all developed markets. Equity market signals were less clear-cut as the combination of higher rates and strong economic growth generated crosscurrents that were less clear. Cash flows should be higher, but the discount rates are also higher. 

Each asset class is special but have some defining characteristics that make them an asset class. Each also has dispersion in returns within the members in the classification. Commodities are an asset class with a very diverse collection of members which may give very conflicting macro/micro signals. 

Global markets has been focused on trade, trade wars, and tariffs. News has been dominated by discussions on trade and less often about dollar currency changes and capital flows, yet capital flows often dominate trade. An increasing dollar is supposed to be emerging market positive through the trade channel, but in reality, a dollar appreciation will increase financial risks and impact EM investments.

With all of the discussion on news, “fake news”, misinformation, and opinion, it is important to focus on some first principles for investing and narrative as news. The narrative is not the facts from an announcement, but the story surrounding the price move coupled with facts. For any investor, it is important to realize that narrative generally follows prices, and prices do not follow narrative.