Opalesque Industry Update - >> The Lyxor Hedge Fund Index was up +0.7% in June 2014 (YTD +1.6%). 7 out of 12 Lyxor Indices ended the month in positive territory, led by the Lyxor Merger Arbitrage Index (+1.7%), the Lyxor Special Situation Index (+1.7%) and the Lyxor Long Short Equity Market Neutral (+1.4%). |
>> Despite rising geopolitical tensions (Iraq, Syria), risky assets performed well in June supported by monetary policy. In early June, the ECB eased policy to address the inadequate financing and support lending throughout Eurozone. The Fed kept its tapering pace in June but reassured markets about the future path for interest rates. Japanese equities did not benefit from added monetary support this month, but the “third arrow” of economic reforms lifted investors’ confidence. This benefitted most strategies, and especially the ones arbitraging illiquid premiums.
>> L/S Equity strategies were up again in June. Geographical exposures were a greater driver than investment biases. Central banks continued to support world equities, but with notable regional differentiation. High skepticism prevailed in Europe on weakening news flow and growing disinflation concerns: most of the positive impact from the ECB’s measures was finally neutralized. Conversely, a valuation catch-up and a positive message conveyed by 'third arrow' measures boosted Japanese equities. US sector rotation continued to stabilize while economic releases remained consistent with a snapback in US Q2 GDP... and with managers' positioning. US funds, which are well represented in the Long bias cluster, benefited a much healthier alpha generation backdrop and more fundamental pricing. Their primary sector exposures remained tilted toward the M&A and corporate actions themes, through allocation to the financial, communication and consumer non-cyclical sectors. While they have reduced their gross exposures, they have maintained their net exposure. Their net exposure, at around 75%, remains in the high 5 years range. Japanese funds were boosted by a rally across the board. Funds most exposed to EM assets also benefitted a mean reversion in Russia, triggered by the appeasement in Ukraine, as well as by improving Chinese manufacturing and by domestic stimulus.
>> Event driven were the strongest performers in June both in Special situation and Merger Arbitrage. Bidding wars, in the Healthcare sector in particular, boosted merger arbitrage funds. Deal spreads compressed across the board on lower risk aversion. We note that Merger arbitrage hold concentrated exposure on the recent jumbo deals. Dovish Fed statements and a consensus over a prolonged period of low rates supported illiquid premiums. While some complacency might result in higher volatility in the future, in June this supported most positions held by Special situation managers.
Most illiquid premiums were supported by assurance of prolonged accommodative liquidity: listed spinoff, IPOs, activist stocks, private equity, LBO and distressed issues rose by 3-4% on average. The top event driven funds' sector exposures are the same as the L/S equity funds': they concentrate on financials, communication and consumer non-cyclical sectors.
>> Convertibles gamma trading detracted performance as volatility continued to weaken. It was offset by positive equity delta and rates hedges in the US. Embedded credit exposures were profitable in all regions. Convertible arbitrage funds somewhat lagged other credit approaches. Indeed, strong CB primary market supply in June weakened valuations. The impact is likely to be short lived. Strong YTD issuances were driven by M&A, capex and SMEs funding. Yet the size of the CB space remains far off pre-crisis assets. Besides, net issuances have actually been flat YTD due to redemptions in the IG segment.
>> L/S Credit funds’ average net exposure remains concentrated on the European convergence theme and EM credit markets. It played out nicely in June. The bulk of the returns were made in the wake of the ECB's move to inject liquidity and improve credit lending. Additionally, signs of a manufacturing stabilization in China and a new set of micro-stimulus unveiled by authorities profited Asian positions. The technical Argentine default following the unexpected NY court decision cost some of the funds.
>> CTAs have now almost made up their YTD losses. Their long held positions in equity and more recently in bond have started to pay off since May. Their overall exposure is currently consistent with a bull play on DM growth. Equities were the dominant contributor this month, along with long US and EU curve positions. Rising oil prices on growing concerns in Iraq also contributed positively. Short base and precious metals were the main performance detractors for long-term models. The lack of volatility breakout continued to keep short-term models away from the current trends.
>> Another strong month for Global Macro. Most of the performance was also made in the wake of the ECB meeting. Rates and equities generated comfortable returns. Their hedged exposure to cyclical commodities through precious metals, contributed little in June. Losses were recorded in Argentine positions and in UK exposures. Weaker UK data and confusion around talks of a earlier rate hikes came as sudden a double whammy.
>> Several key macro and market paradoxes persist. Rates pricing stagnation or stagflation amid record low volatility, dispersion and spreads isn’t the least of them. Such paradoxes will not prolong indefinitely. We believe volatility and dispersion are set to rebound some time this year, making pure beta portfolios less attractive. “Hedge fund assets stand at record levels. Growth is being driven by institutions seeking alternatives to traditional equity and fixed income investments”, says Jean-Marc Stenger, Chief Investment Officer for Alternative Investments at Lyxor AM.
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