Continue buying
Sentiment remains ebullient as investors are determined to maintain the positive momentum in risk assets, which has sent the Russell 2000 index up 7% in just the past six trading sessions and is now up 22% from the March 30th YTD lows.
What matters this week
MTUM has gone vertical and is now effectively a semis bet — with risk-taking readings echoing the dot-com era, the odds of a reversal that would relieve value and mean-reversion books are rising.
Cheaper crude is the swing factor. If oil keeps cascading lower, the recent US-leadership trade could reverse in favor of EM and DM ex-US exposures.
Gains are a slow burn — early-month winners turned into a quagmire over the past two weeks. The task now is preserving YTD hedge-fund PnL through a thin summer.
The view
The Familiar Arc
Here we are again. We just experienced the spring, Trump-action induced market swoon followed by a swift, nearly miraculous re-risking in its wake.
Looking ahead, based upon previous Trump presidential years, we have a smooth upward trend over the summer with a bit of turbulence in the fall that will ultimately be resolved in a year-end rally.
Thankfully, hedge fund performance has a good head start in 2026 compared to some previous Trump years when the Spring meat grinder left hedge fund performance lagging, which led to a reliance on big returns in H2 to meet CY HF portfolio return expectations.
Hopefully the embedded YTD HF PNL will be preserved through the summer malaise and not squandered from complacency in noisy thinly traded price action.
Global markets & economic data
- US
Crude stockpiles fell by 2.8mm barrels last week but have risen by 22mm barrels YTD. April Consumer Spending rose 0.5% m/m with increased energy spending contributing, but other categories like food & beverages, nondurable goods, recreational goods, and vehicles are seeing a surprising uptick.
- Switzerland / UK / Europe
Swiss KOF Leading Indicators ticked up slightly in April, in-line with expectations. UK Retail Sales were flat y/y in April, below forecasts. EU sentiment rose slightly m/m but remains close to five-year lows.
- Japan / China
The Japanese Unemployment rate fell to 2.5% as the number of unemployed hit an eight-month low. Chinese FDI fell 10.3% y/y in April, a deeper drop than anticipated.
Market spotlights
The momentum of MTUM
In finance, “momentum” refers to the tendency of an asset’s price to continue moving in the same direction for a period of time. Strong recent winners keep attracting flows, earnings trends have been improving for leading companies, and a narrow leadership group has kept trends intact. That mix creates a favorable backdrop for trend-following strategies, especially when investors are optimistic and willing to chase what is already working.
The recent surge of the “Momentum” factor has been particularly violent, which creates profits and losses across hedge fund strategies. The MTUM ETF is currently dominated by semi companies, which fundamentally are exciting investors. Many hedge funds are long various areas in IT currently and are therefore profiting from the rally in MTUM.
On the flipside, mean reverting systematic quant strategies and value oriented strategies are currently languishing due to narrow market leadership caused by the dominance of MTUM. Given the stretched rally in MTUM over a short time period there is growing risk of reversal and or consolidation, both which would be a welcome development for these type of managers.
Historically, the current environment is beginning to technically mimic the dot.com era with risk taking readings hitting levels last seen during that epoch.
The Catalyst for Change
The start of the year witnessed ROW outperformance of US equities. Then the war came along, oil prices skyrocketed and the ROW fell far out of favor.
Europe, specifically Germany (ETF EWG), is a poster child for the headwinds faced since March due to a strong US dollar and a surge in energy prices.
If oil continues to cascade lower, the US outperformance trend of recent months could swiftly reverse, which would benefit both EM and DM ex-US exposures.
Proprietary · Masterpiece HF Alpha Monitor
Where our liquid strategies stand
Consolidated rolling 1-year
It’s a slow burn for the overall portfolio.
We are watching gains dissipate daily as winning exposures at the start of the month turned into a quagmire over the past two weeks.
The Masterpiece HF Alpha Monitor analyzes hedge fund exposures, themes, and positioning to model the performance of long/short liquid trading strategies. Our approach enables interactive monitoring of market developments, enhancing our understanding of the current risks and opportunities in the marketplace.
This commentary is for informational purposes only and is not a solicitation. Past performance is not indicative of future results. Opinions expressed are those of Masterpiece Advisors, LLC as of the date of this commentary and are subject to change.
Weekly market notes every Friday from Aaron Sweeney after the closing bell.