-The Lyxor Hedge Fund Index was up 0.84 in May, with 6 out of 10 Lyxor indices ending the month with a positive performance. The more directional strategies had the best returns....
- Event-Driven Strategies led the pack, as they benefited from an acceleration of M&A activity and the completion of large merger deals. Special Situations (+2.5%) outperformed Merger Arbitrage (+1.4%).
- Global Macro managers are back in the green thanks to the strengthening US dollar and their fixed income portfolio.
Global financial markets showed a pleasant picture in May as risk aversion receded. Equity indices displayed positive returns worldwide, with the US, European and Japanese indices outperforming Emerging markets. The latter were hit by the hawkish Fed minutes, which revived fears of a US rate hike over the summer. As a result, the US dollar strengthened, advancing against both DM and EM currencies. Meanwhile, with the UK Referendum getting closer, the UK pound experienced strong volatility. Commodity prices rebounded, with oil prices holding strong, near $50 a barrel at the end of the period. In the fixed income credit space the rally started to slow down in both Europe and the US. Finally, sovereign 10Y yields tightened in Europe, but remained flat in the US, highlighting the divergence of monetary path across the board.
On the alternative side, the Lyxor Hedge Fund Index was up 0.8% through the month, with Event Driven outperforming. Strategies with more directionality contributed to the bulk of the gains while CTAs continued to suffer from shifting market trends.
Event Driven kept up the positive momentum with Special Situations (+2.5%) outperforming Merger Arbitrage (+1.4%). The month of May recorded an acceleration of M&A activity. This dynamic is supportive for merger arbitrage as it provides a broader set of investable opportunities. Managers also benefited from a number of successful deal completions (including Time Warner Cable vs Charter Communication), while spread tightening on various transactions added to the gains (Baxalta vs Shire, SAB Miller vs AB Inbev). Special Situations funds, which are more sensitive to market directionality than their peers, extended gains in May with the improvement of risk appetite. They thrived on their core positioning on Akorn, Athabasca Oil and Dow Chemical stocks.
L/S Equity funds outperformed the MSCI World index, with long bias managers leading the pack. L/S Equity managers stuck to their guns, maintaining a cautious stance, with a dwindling exposure to cyclicals. In May, long positions on the financial and technology sectors were rewarding, though the picture was different across regions. All European managers posted strong returns on the back of the quality bias on their long books. Yet, ahead of a number of uncertain macro events and the looming UK Referendum vote, managers held a tilt towards defensive sectors and kept a low net exposure. This explains that their participation to the market rally during the second half of the month was somewhat limited. On the other side of the Atlantic, outcomes were significantly disparate. US managers took advantage from the rebound in the healthcare sector but suffered from their long exposure to the industrials and materials. The consumer sector, which remained their biggest allocation, struggled to cope with the increasing odds of a near term Fed rate hike. Last but not least, L/S equity stock pickers benefited from the rising dispersion in stocks.
Fixed income and Credit arbitrage performances were muted as the positive support from the ECB and oil price appreciation started to fade away in credit markets. Managers recorded contrasting results, underlining the fact that alpha generation made the difference. Asian managers outperformed on the back of their positions on the energy and basic materials sectors while the performance of European funds was milder than that of their peers.
Global macro managers recouped the bulk of losses incurred last month, up 1.2%, thanks to the strengthening of the US dollar and their fixed income portfolio. Yet, this picture hides disparate returns across managers due to different positioning. Overall, long exposures to the USD against the G-10 currencies were the most rewarding. Managers sharply increased their short allocation to the EUR. The picture was similar for the fixed income bucket as returns were fuelled by both short exposures to US and UK durations and longs on European bonds. Relative value trades were also beneficial. Risk-on positioned managers performed well when risk aversion receded, in particular thanks to long bets on European and Japanese stocks. On the other hand, shorts in US equities were detrimental. Finally, with a short allocation on all commodities on aggregate, the contribution of the commodity cluster was mixed. While the rebound in energy was a detractor, the slump of precious and base metal prices helped to mitigate losses.
The appreciation of the US dollar and the rebound in energy prices were detrimental to CTAs. Long term models (-3.1%) weighted on the overall performance, while short term ones (-0.5%) proved more resilient. The strengthening of the USD was harmful to their short stances, especially against AUD, JPY and EM currencies. Alpha generation on shorts in EUR, CHF and GBP helped mitigating losses. The commodity bucket was costly as well. On the one hand, the slide in precious metal prices weighted on long allocations to the asset class. On the other hand, models increased their short exposure to energy, and were negatively impacted by the rebound in oil prices. The equity bucket was a mixed bag. The fixed income portfolio was the bright spot, as long allocations to German bonds benefited from the downward move of bond yields.