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The Lyxor Hedge Fund Index was up +1.4% in January, as reflation wind is blowing

Thursday, February 12, 2015
Opalesque Industry Update - >> The Lyxor Hedge Fund Index was up +1.4% in January. 7 out of 12 Lyxor Indices ended the month in positive territory, led by the Lyxor CTA Long Term Index (+5.6%), the Lyxor Fixed Income Arbitrage Index (+4.4%), the Lyxor Global Macro Index (+2.7%), the Lyxor L/S Equity Variable Bias Index (+2.2%).

>> Market activity was limited ahead of the ECB meeting, the key catalyst in January, and positioning remained under stressed. ECB didn’t disappoint. It announced a large open-ended QE program, amounting to €60 billion per month. It was warmly welcome by the Street, with cautious odds of success being priced in. Macro assets (Euro, periphery trades) took the lead, followed by micro assets (Equity & Credit) more selectively. A dovish wind blew elsewhere too, adding further support to world reflation assets. Macro and momentum oriented funds benefitted the most from a continuation of the trades playing out since the end of last year: the new oil regime, disinflationary trends and reflation efforts. The ECB move also benefitted the European L/S Equity funds, well represented in the Equity Variable space.

>> Dispersion among L/S Equity funds was high in January. European funds strongly outperformed, boosted by the ECB’s reflation and a return of flows in the region. The volatility in Asian funds reflected the V-shape correction and recovery in the Shanghai’s benchmark stock index. It was triggered by the regulators’ announcement of tighter trading rules with a view to curb margins debt. The S&P 500 traded in a tight 2000/2060 range, providing a poor beta to US L/S Equity funds. They however generated some alpha, through their thematic exposures. Indeed, the same new oil regime theme continued to unfold at a sector level. Positions in the Energy, Consumer, Industrial and Financial sectors were profitable. The laborious consolidation process of oil prices spurred some volatility in these positions by month-end. The earning season started by mid month. The US season was only a marginal positive to alpha generation.

Markets’ expectations on and reaction to EPS releases were both mild, and largely macro driven. The European and Japanese seasons were richer for alpha generation. A more positive set of catalysts (weaker currency, reflation trends, weaker oil) and better momentum in analysts’ revisions provided a more positive tone. The focus on company specific developments was also greater than in the US.

>> Performances in the Event Driven space continued to be weak. High macro uncertainty and erratic trading early this year contributed to maintain pressure on illiquidity premium and special situations’ valuations. Such pressure started to ease in the second part of the month, on a dovish read of the Fed’s normalization pace. Special Situations’ sensitivity to oil prices proved yet again softer than in 2014. It reflects the significant portfolio rotation implemented by fall out of the energy sector. Idiosyncratic developments prevailed in January. Hertz’s delayed asset sales program, a higher share of Ally financials’ non-performing loans,some losses in the healthcare sector and weakness in their residual energy positions altogether contributed to a poor Special Situation performance in January.

Merger Arbitrage funds fared better, ending flat. M&A activity was subdued in the early part of the month. Rotation in portfolios was limited and elevated risk aversion by mid-month weighted on deal spreads. The lost ground was gradually regained in the second part of the month as optimism returned and as new large deals got announced.

>> The L/S Credit funds’ returns were marginally positive. Their conservative positioning helped them navigate a hill start for credit markets early January. Funds with higher focus on Europe outperformed. Some losses were recorded in Greek exposures. However periphery trades remained broadly immune from the Greek volatility. While the announced QE will mainly include public asset purchases, European HY credit spread compressed by around 40bps following the ECB meeting. European ABS recorded strong performance. Contribution from EM credit exposure was marginally negative.

Pressure on convertibles resumed in January. Exposures to HY issues and to some energy positions were a drag. Equity and rates hedges also proved costly. Funds only partially benefitted from the rally in European convertible market after the ECB meeting.

>> CTAs were yet again the outperformers this month. On balance, models were positively impacted by the SNB’s decision to remove the cap, in place since 2011, to prevent CHF to rise too high against the euro. The cap was maintained by printing francs on a regular basis to buy Euros. The bulk of the performance however stemmed from the decline in Euro and European markets rallying both on equities and bonds ahead of the ECB meeting. Positioning on energy was disparate among funds. The rebound in oil prices by month end was a drag for those funds having the largest short on energy.

>> Global Macro and sovereign fixed income arbitrage funds enjoyed a strong month. They were adequately positioned to capture the ECB reflation boost. The continued fall in Euro was a major performance driver, followed by equities. On average rates were a marginal drag. Managers played a rally in yield to reflect the strength of the US economy. They reduced their short bond positioned following the Eurozone announced QE. Some funds reported minor losses on soft commodities. The sharp fall in wheat and barley prices was driven by confirmation of ample supply and stronger likelihood of inventories reaching record levels.

>> “Global economy remains in a pivotal state. Some encouraging signs in Eurozone and the - unstable - oil prices stabilization could temporarily reverse the disinflationary and new oil regime trades played out for weeks.”, says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.

From: THE ALTERNATIVE INVESTMENT INDUSTRY BAROMETER, Feb.11, 2015

www.lyxor.com

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