In brief
Before turning to markets, it is worth acknowledging a few of the quarter's more important developments! Our congratulations to Spain on lifting the World Cup and to the Knicks on finally bringing a championship back to New York (it was a long 50 years…). While celebrations were undoubtedly louder in some JPMAAM offices than others, financial markets ensured there was no shortage of excitement for investors during Q2.
Geopolitics, shifting inflation expectations, as well as equity sector and factor rotations set the tone for an interesting quarter. Early in the quarter, a de escalation of tensions in the Middle East helped improve investor sentiment. As near-term inflation concerns eased, energy prices pulled back and risk assets moved higher. Gains were front loaded in April and May, though results varied meaningfully across markets. Equities led the recovery, with the technology sector rebounding sharply as leadership rotated back toward the artificial intelligence trade. Strength was concentrated in semiconductors, IT hardware, electrical equipment, and data center infrastructure. A strong earnings season reinforced confidence and drove upward revisions to expectations across several sectors.
While the US and Europe performance was strong, Asia was the standout performer, supported by its concentrated exposure to AI and related supply chains. Growth materially outpaced value, and small caps also benefited from supply chain strength. Rates rose across most points of the yield curve, but spreads tightened from recent wides, helping high yield and investment grade credit finish the quarter modestly higher. Commodities detracted overall as oil and precious metals declined, while industrial metals held up better on technology and infrastructure demand.
From a hedge fund perspective, Q2 was one of the strongest performing quarters we’ve seen across the industry in many years and, by our estimate, the second-best quarter on record for our balanced portfolios. Broadly speaking, the Q1 volatility spike created a broad set of opportunities to generate alpha, which managers were able to harvest across asset classes as markets normalized through Q2. Performance was broad based, with positive contributions across every strategy. Long Short Equity was the standout, up roughly 19% for the quarter, with every Long/Short manager on the platform finishing in positive territory. Uncorrelated Strategies also delivered noteworthy gains, with both Relative Value and Macro producing solid results.
Looking ahead to Q3, we retain our core overweight to uncorrelated strategies, complemented by more selective exposure to directional equity and credit themes. Underneath the surface, however, we’ve made several small adjustments to our outlook in response to rapidly changing market dynamics. Increased crowding, elevated factor volatility, and the growth of levered ETFs have a host of new risks and opportunities that bear monitoring. In response to these risks, we’ve aimed to reduce our exposure to some strategies with directional biases and those which carry meaningful factor risk with longer holding periods. Conversely, we’ve continued to lean into more tightly risk managed strategies and those with greater exposure to the growing opportunity set in ECM and DCM.