Lyxor Weekly Brief

The Lyxor Hedge Fund Index was up +1.1% in October. 8 out of 11 Lyxor Indices ended the month in positive territory. The Lyxor LS Equity Long Bias Index (+4.5%), the Lyxor Special Situations Index (+3.5%) and the Lyxor Global Macro Index (+2.1%) were the best performers...

>> Encouraging October economic releases, speculation about non-US central banks actions, and the re-risking of the smart money helped to fuel a rally. The wheel turned in favor of Event Driven and the longest bias L/S Equity. In contrast, CTAs underperformed, hit on their long bonds exposure. Market Neutral funds also suffered from factor rotations.

>> Within the L/S Equity space, US long bias funds led the group, while pressure fell upon the Market Neutral funds. After weeks of bleeding, the longest bias funds staged a substantial rally, especially in the US. It made up for most of the lost ground since  the end of August. Exposures were little altered over the period: this was mainly a beta recovery. In contrast, the other sub-strategies only captured part of the bullish impetus. The Variable bias funds, which had demonstrated an impressive resilience during the sell-off, remained cautiously exposed. By the end of October, they had only marginally rebuilt their net exposures. Market neutral endured a difficult month, hit by two rounds of market rotation. The first one started by the end of September, with a severe turn in the Momentum factor. The second rotation – of lesser violence – unfolded after the FOMC, which resulted in a sector repositioning. The loads of EPS releases published over the month were not a key source of alpha. While better than feared, the US season remained very macro driven with little stock discrimination. The season in Europe (and to a lesser extent in Japan) proved more challenging, with more disappointments. As markets gradually exit this W-shaped episode, stock correlations are starting to recede. This should help restore the alpha potential.

>> Event Driven funds, main victims of the sell-off, were prime beneficiaries of the rally. Special situation funds outperformed in October. Receding concerns about global growth, further easing expected from non-US central banks, and flows returning to the market altogether gave a strong lift to corporate situations. The recovery was particularly notable in the most liquid segments. The rally in spinoffs and IPOs was faster than in activist or in distressed positions. The healthcare sector continued to be a source of volatility. However funds shaved off their holdings in the sector, and in particular, few funds had meaningful exposure to Valeant. The recovery in Merger Arbitrage lagged, with several deals coming under regulatory scrutiny.

>> The L/S Credit Arbitrage funds delivered flat returns. Conservatively exposed, they didn’t benefit from the tightening of HY spreads both in the US and in Europe.

>> CTAs’ long exposures in bonds came under pressure. The performance of the long-term models see-sawed over the month, paced by the volatility of energy contracts and by rates. US yields, which surged following the FOMC, were the primary detractor of performance. The rapid repricing of the US front curve was partially offset by gains in European bonds. These rallied following ECB’s hints at a possible action by December. Currencies and equities were minor but positive contributors. The overall dollar exposure of long-term models was gradually cut. Instead, they held increasingly differentiated FX positions, including short Euro and JPY (vs. USD), against longs in GBP. The equity bucket was also mildly positive, as models gradually rebuilt their long positions. Faster in rotating their portfolios, short-term models outperformed their long-term peers in October.

>> Strong Global Macro returns, boosted by their long held dollars and equities. The month started on a positive note. Their gains from the equity rally more than offset losses in the FX and rates exposures. They actively rotated their bond exposures, which did not deliver substantial gains. However, the bulk of the P&L was achieved after the mildly hawkish FOMC. Their long held strong USD positions finally paid off. Their exposure to commodities remained limited in net exposure, most of their stakes being concentrated on energy relative value arbitrage.

>> “The rally is losing breath, providing fading support to the most directional L/S Equity and Event Driven funds. Our focus gradually returns to the relative value and macro strategies.” says Jean- Baptiste Berthon, senior cross asset strategist at Lyxor AM.


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