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Alternative Market Briefing

After months of rollercoasting, the alpha environment for hedge funds is normalizing

Tuesday, April 16, 2019

Laxman Pai, Opalesque Asia:

After months of rollercoasting the environment for alpha normalized, however with persisting constraints, said Lyxor in its Weekly Brief.

Witnessed by a plunge in equity correlations and a weaker share of stock returns attributable to broad market moves, investors are refocusing on company specifics.

The earnings season kicked off and will soon confirm whether prices faithfully reflect changes in stock fundamentals, which is a key pattern for managers' alpha. To that regard, the consistency of equity market moves with the quality of incoming economic data bodes well. Managers still enjoy a rich universe of fresh stock opportunities, those that are starting to show momentum but not too mature yet.

"Our key concerns for alpha relate to trends in policy uncertainty and swings in monetary policies, which have both plagued active managers last year. A U.S.-China agreement will ease uncertainty, but only partially given another 6-month Brexit delay and the auto tariffs wildcard," the weekly report said.

Moreover, the dovish Fed turn and delays in DM monetary normalization might fuel market distortions detrimental for alpha. Price dispersion is rapidly shrinking in mainstream segments, which is curbing stock pickers' arbitrage potential.

"We note that dispersion is still wide in smaller caps and in several sectors, including consumer, healthcare and financials. Amid fair equity valuation, these factors ......................

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