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Alternative Market Briefing

CTA strategies end in positive territory in May

Tuesday, June 04, 2019

Laxman Pai, Opalesque Asia:

Alternative strategies performed reasonably well in May given the adverse conditions, said Lyxor in its Weekly Brief.

Hedge fund strategies were down last week and for the full month of May on the back of adverse market conditions. Yet, alternative strategies performed reasonably well considering the extent of the equity market downturn.

Directional L/S Equity strategies underperformed but the drawdown was contained (-1.2% as of May 28). L/S Credit, L/S Equity Market Neutral and Merger Arbitrage posted flat or slightly negative returns in the range of 0.0% to -0.3%. Then, CTAs managed to deliver returns in positive territory, up +0.6% as of May 28.

CTAs have managed to protect portfolios in the current risk-off episode after having failed to do so last year, for three main reasons.

First, the long equity positioning of CTAs was more aggressive in early Q1-18 in the wake of the 2017 market rally than it was at end-April this year.

Second, the equity market reversal has been softer this time compared to last year, which gave more time for CTAs to trim equity positions without suffering hefty losses.

Third, in early Q1-18 and Q4-18, trend reversals also impacted the fixed income asset class, with bond yields falling after a persistent upward trend. It also caught CTAs on the wrong side last year.

Recently, bond yields kept falling and merely extended the persistent downward trend. CTAs' long fixed income ......................

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