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Laxman Pai, Opalesque Asia: The recent escalation in trade wars took a heavy toll on risk assets in May and the Tech sector underperformed the U.S. equity market while Chinese stocks suffered a heavy blow, said Lyxor research report.
Meanwhile, the bond market rally has proved unstoppable, especially as the Fed is considering rate cuts. In Germany, 10Y Bund yields reached record lows early June.
Hedge funds were relatively resilient thanks to their defensive stance. Directional L/S Equity and Global Macro strategies underperformed in May, but the losses were largely contained.
Concurrently, CTAs, L/S Credit and Market Neutral L/S managed to deliver positive returns. In particular, CTAs outperformed in May thanks to their long fixed income positions which more than offset equity losses, Lyxor said.
Event Driven strategies were slightly down, with Special Situations strategies underperforming Merger Arbitrage on the back of their higher equity market beta.
"Going forward, we maintain an Overweight stance on Event-Driven and Fixed Income Arbitrage versus L/S Equity and CTA/ Macro. We believe that market conditions remain vulnerable and have re-weighted Market Neutral L/S strategies to Overweight, at the expense of long biased L/S Equity," said the report.
The momentum risk factor to which the Market Neutral strategy is sensitive to is much more defensive today than it was last year, on the back of the rally in low beta stocks.
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