Asset and sector rotations accelerated this week. US yields kept on adjusting to the Fed, which gives every signs it will proceed with normalization. In addition to US rate-sensitive sectors, it boosted Europe and Japan equities, but weakened EM, metals and gold. Mr. Trump also unveiled its tax blueprint....
02 oct 2017 - By Lyxor Cross Asset Research - The Weekly Brief
Jean-Baptiste Berthon Senior Strategist, Cross Asset Research Lyxor Asset Management
This is a best case scenario, which will be curtailed, but it does revive fiscal hopes. Those companies most sensitive to tax and foreign earnings repatriation were back in full swing this week.
These two developments reverberated in hedge funds. We take the opportunity to highlight how hedge funds reshuffle their portfolio after nearly 4 weeks of rising rates.
On the losing side this week, CTAs were hit on their equities as well as on their short dollar positions, partially offset by their short on agricultural. CTAs allocations materially changed.
They have fully rebuilt very long European and US bond exposures. They also strengthened gold positions and remain heavily short dollar especially vs. non-G10 FX. They are the most contrarian and are vulnerable to further rates and dollar appreciation.
L/S Equity marginally suffered from the rotations out of growth and defensive into value and cyclical stocks. Those focusing on EM underperformed the most. In aggregate, L/S Equity are adding risks from reduced exposures. They are rebuilding positions in the US, in financials and consumer sectors especially. They are adding cyclical stocks in Europe at the expense of healthcare and resources. Japan exposures remained stable.
Special Situations funds gave some gains back, with losses in the communication partially offset by energy positions. Event Driven stand to gain the most from a tax cut package. They have not materially changed their allocations.
On the bright side, Global Macro funds took the lead, with their short EUR and GBP paying off. Their long energy also proved beneficial. Unlike CTAs, they have fully rebuilt long dollar positions especially vs. EUR. They continue to reduce their long commodity exposure, which concentrate in energy. Their fixed income exposure remain polarized between long US vs. short European bonds.