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Laxman Pai, Opalesque Asia:

Since the beginning of December, Merger Arbitrage and L/S Equity Market Neutral outperformed as the market conditions continue to favour low beta hedge fund strategies, said Lyxor in its Weekly Brief. However, L/S Equity remains under pressure.

Relative Value arbitrage was resilient. Based on a peer group of 28 onshore L/S Credit strategies, the median performance was -0.3% month-to-date (up to December 12th) and -1.3% quarter-to-date.

Yet, liquidity concerns have investors in L/S Credit strategies on defensive mode. According to Morningstar data, onshore Fixed Income strategies experienced large outflows in September and October.

"Going forward, we note that U.S. corporate leverage has stabilized since 2015 at levels that prevailed in the run-up to the Global Financial Crisis," the weekly report from Lyxor's Cross Asset Research team said.

High yield default rates forecasted by rating agencies in twelve months remain nonetheless benign in Europe and the U.S. They are expected to remain below 2.5% against an average of 2.7% and 3.4% respectively over the past five years.

Yet, liquidity tensions can flare up rapidly in current market conditions and cause wide fluctuations in asset prices.

"We are ourselves bearish on credit. We expect wider spreads across regions as a consequence of softer macro data, the end of QE in the euro area and asset reallocation out of credit in favour of Treasuries. Investors are thus probably right......................

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