The escalation of conflict in the Middle East and the effective closure of the Strait of Hormuz – a vital artery for the global oil supply – triggered heightened volatility across financial markets. Investors grappled with mounting geopolitical risks and surging oil prices, as Brent Crude climbed above $100 a barrel for the first time since 2022.
Global equities experienced their worst monthly return since 2022, falling 6.8%, with markets most acutely exposed to energy prices, such as Japan and the broader Asian region, seeing the steepest declines.
To manage the risk within the fund, we initially reduced the tracking error by taking profit across several themes that had delivered strong returns, such as value equities and opportunities in AI that were trading at attractive valuations. As the potential for a sustained conflict grew, the probability of adverse market outcomes increased. Consequently, we tactically reduced our equity exposure through a broad reduction across US, UK, European, and Japanese equity markets.
Within fixed income, rising oil prices threatened to push headline inflation further from central bank targets, leading investors to price in potential interest rate hikes across the US, UK, and Europe. As a result, government bonds struggled to provide investors with diversification, as a sell-off in longer-dated bonds drove yields higher. We continue to favour short-dated corporate bonds, which are less sensitive to inflation dynamics and fiscal pressures.
Within alternatives, gold came under pressure, with prices declining sharply as markets weighed inflationary risks against the likelihood of further central bank rate hikes. However, our allocation to diversifying assets once again provided returns uncorrelated to equities and bonds. Specifically, the AQR Managed Futures and AQR Style Premia funds – which invest across equities, fixed income, commodities, and FX – gained 1.9% and 0.5%, respectively.
