Over the recent weeks, hedge funds have remained broadly defensive. They are definitely not adding risk in portfolios ahead of key announcements in June that may disrupt market conditions...
The Brexit referendum ranks first amongst near term potential disruptors and several European L/S Equity managers have decided to downsize significantly their exposure to UK assets ahead of the vote. Meanwhile, CTAs and Macro managers maintain large net short positions on the GBP versus USD. The former recently added to their GBPUSD shorts while the latter slightly reduced their short positions on the Cable at the end of May.
The mid-June FOMC meeting and the associated summary of economic projections will also be closely monitored amidst signals that US economic activity accelerated in Q2. As a result of such near term uncertainties, the median equity beta of hedge funds on the Lyxor platform remained below 20% during the last week of May and edged lower for strategies such as CTAs, Global Macro and multistrategy.
With regards to recent performance, the last week of May was supportive for every strategy, with Macro and L/S Equity funds outperforming. Macro managers benefitted from their equity exposures and from the USD rally. In the L/S Equity space, variable biased managers outperformed. It is interesting to note that L/S managers with a defensive bias made the most of the market environment in May as the value rally faded. On a negative note, CTAs continued to underperform lately and for the full month of May the Lyxor CTA Broad index is down 2.3%.
Going forward, we maintain the preference for strategies that limit the exposure to market directionality (prefer merger arbitrage to special situations, prefer market neutral and variable biased L/S to long biased managers). We also remain overweight CTAs in the midterm though tactically we advise a neutral stance as the large built up of short GBPUSD positions would cause losses if the UK opts for remaining in the EU. Finally we are neutral on L/S Credit and overweight Fixed Income Arbitrage as part of our preference for strategies with lower market exposure ahead of key June announcements.