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Lyxor: Frenzied M&A activity to support event driven strategies

Monday, October 31, 2016
Opalesque Industry Update - October was a supportive month for Global Macro funds, which almost erased their year to date losses in a single month, according to the Lyxor Weekly Brief research note. The top contributors to their stellar performance last month included a short duration stance in fixed income and long positions on the USD vs. EUR and GBP in FX. Meanwhile, for Macro managers investing in equities, their preference for European and Japanese equities vs. US equities also paid off in October.

On a positive note as well, CTAs staged an upturn last week. They underperformed in October as a result of their long duration stance in fixed income and short energy in commodities, which they shaved off aggressively over the course of October. At present, their neutral position on bond duration may allow them to better navigate the rising yield environment. The strategy was actually up 0.6% last week as their short EUR and GBP vs. USD contributed to performance in a similar fashion than it did for Macro managers.

With regards to Event-Driven, the strategy underperformed last week (-0.3%) and is down almost 1% last month. It is not surprising to see the strategy in the red when 10-year Treasury yields jump 25 bps in a month, as it has historically been negatively correlated to bond yields. But most managers were fairly resilient despite the adverse market conditions.

Going forward, we maintain our slight overweight stance on Event-Driven, with a continued preference for merger arbitrage players. We believe that the strategy can cope with higher bond yields as its net exposure to both equities and bonds has continued to decrease lately. Managers have thus ample room to deploy capital as opportunities arise. And in that regard, Bloomberg data suggests that October was one of busiest months ever for global M&A activity. Announced M&A deals represented more than USD 470bn (applies to deals with a transaction value above USD 400m). US M&A activity represented 60% of the total, and the media sector has been the most active thanks to deals such as the USD 107bn proposed merger between AT&T and Time Warner. Yet, ahead of US elections most Event Driven managers have stayed cautious and will wait for greater political clarity before deploying their capital. The strategy is thus likely to be resilient if equity volatility continues to rise, which would lead to wider deal spreads and open the door for cash deployment.

The full research note is available here.

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