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Alternative Market Briefing

Quantitative easing and the surge in policy uncertainties influence alpha: Lyxor

Tuesday, March 12, 2019

Laxman Pai, Opalesque Asia:

The alpha generated by hedge funds, and more generally by active managers, is influenced by multiple factors, pointed out Lyxor in its Weekly Brief.

Some factors are cyclicals and reflect macro and markets dynamics. Others are more structural in nature, including the growth in indexed products and algorithmic trading, financial regulations, greater market access, faster information and portfolio transparency dissemination, said Lyxor's Cross Asset Research team.

However, the following two factors have been dominant over the recent years for alpha: quantitative easing and more recently the surge in policy uncertainties in most regions.

Quantitative easing, led by the Fed, joined later by the Bank of Japan, ECB and others, flushed markets with liquidity. It distorted risk premium and assets' relationships, which are pivotal for fundamental or quantitative styles.

Witness the close relationship between hedge fund alpha vs. the size of central banks' assets. With monetary normalization now firmly on course, more fundamental pricing and greater asset dispersion would gradually lift key hurdles for active managers.

Policy uncertainties suge in most regions

More recently, policy uncertainties surged in most regions. The surprise Brexit referendum and intensifying disintegrating forces in Europe have multiplied.

In parallel, U.S. authorities weaponized uncertainty, as they attempted to alter the world trade order towards mor......................

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