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The optimism prevailing at the end of 2013 was revised down until April, as it became clear that global growth would disappoint and recover at a very modest pace. Evidences of a US Q2 snapback, continued (though laborious) progresses in EU, signs of stabilization in China, and central banks outbidding on dovish statements altogether contributed to restore confidence. This benefitted almost all hedge fund strategies, in particular the L/S equity and Event driven.

All L/S Equity strategies were up in May. Variable bias funds outperformed up +1.4%. As risk aversion receded, the painful and sudden style & sector rotations finally bottomed up. L/S equity funds had only marginally shaved of their exposures in response to the sector rotation, and remained overall bullish. Variable funds' average net exposure was only cut from 30% down to 25%, and Long bias funds kept their net exposure close to 80%. Instead, greater allocation to non-cyclical at the expense of high beta stocks was notable since March in most funds whatever their operating region. We note that the themes played in the US (tilted toward M&A and corporate actions, through allocation in the financial and communication sectors) differed from that played in Europe, more exposed to domestic demand driven sectors (consumer cyclical net European funds exposure stand at close to 15%).

Greater risk appetite also profited Event Driven funds. M&A deal spread have improved since mid April amid stronger volumes of activity and more aggressive operations. Meanwhile merger arbitrage funds have been so far successful at avoiding exposure to announced deals which would later on be given up, in particular Pfizer and Publicis. Special situation funds were up +1.5%. They had suffered from their allocation tilt toward cyclical and growth stocks turning out of favour (financial, communication and consumer cyclical stakes account for about 3/5th of their net exposure). Recovering investors sentiment then fully benefitted their exposures. Special situation funds display a 50% net exposure in equities, and 20% in credit on average.

Market momentum was softer in credit. US markets had to digest disappointing Q1 related releases. Instead, the improving Chinese picture and ECB gradually leaking to the Street its plan to take action, supported credit exposures in these regions. Given the dearth of long short credit opportunities and tight valuations, Lyxor's Credit funds are concentrated on 2 main areas: the EU convergence play and the EM. In Europe they hold significant stakes mainly through the financial sector in Greece, Ireland and Italy (altogether accounting for 40% in net exposure). Besides they hold a 30% net exposure in Asia, Latam and Eastern Europe. They are net short the US market by almost -5%. These strong sector and geographic stances paid off in May: L/S credit funds are up +0.3%, with dispersion though among funds. Conversely, two third of the Lyxor Convertible arbitrageurs' long market value is allocated to the US. The remaining is primarily allocated to Europe, with a much smaller stake in Asia and Japan. The average return was soft in May (+0.1%) with fund dispersion. The credit and equity delta positively contributed ; gamma trading didn't, amid falling implied volatilities. Besides, issuances were weaker, probably resulting from rising risk aversion in the previous months.

Long term CTA were up +2.5%. Their returns have been ebbing for several months, with notable sensitivity to equities, and increasingly, from rates where they have been building up positions. Their gains were eroded on long Euro positions, which were significantly reduced by month-end, to the benefit of GBP and AUD. These currencies positively reacted to RBA and BOE statement releases. Short term models were once again slightly down. Their performance in May was however less surprising than that recorded in previous range trading months. Range trading is supposedly relatively favorable to their approach. Which holds true provided that ST trends & volatility unravel over the period. On the contrary, markets YTD have overall been either trendless or subject to offsetting ST trends.

Step by step, Global macro funds are catching up: they returned +0.3% in May. Overall they successfully played the multiple and small moves in rates and FX reacting to central banks or turns in economic news flows. They profited from relative value arbitrage in the commodity sector. Rising equities were also supportive to their constructive global growth prospects and allocation.

"Global growth failing to level with expectations has been roughly priced in through rates, range trading, and sector & style rotation. This surprised and hurt those funds most exposed to highly valued and crowded stocks. With this in mind and behind, beta contribution should improve in H2, with a healthier alpha backdrop", says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.

Lyxor