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Lyxor Hedge Fund Index up +1.2% in May (+3.93% YTD)

Thursday, June 11, 2015
Opalesque Industry Update - >> The Lyxor Hedge Fund Index was up +1.2% in May. 10 out of 12 Lyxor Indices ended the month in positive territory, led by the Lyxor Fixed Income Arbitrage Index, the Lyxor LS Equity Long Bias Index, and the Lyxor Global Macro Index (all up +1.9%).

>> Most strategies delivered positive returns in May to the exception of CTAs taking a hit from the macro rotation which started in April. Put in perspective, for most of Q1, markets priced in a strong US economic lead giving support to non-US reflations. Resurfacing global growth concerns triggered multiple reversals in April. The cyclical slowdown in US and China eroded support to the fragile inflection in Eurozone, via higher Euro, oil, and yields. This was amplified by profit taking and QE distortions, in particular in bonds which endured a staggering plunge.

>> L/S Equity funds rallied after the challenging first week of May. At an equity level, the macro rotation resulted in a repositioning out of the most stretched momentum stocks into the ones offering growth at reasonable price. Over the first week of May, L/S equity funds were down -1.2% on average. Unsurprisingly the longest bias funds were the most impacted, along with few funds hit by rotation in growth and small cap styles. After this hill-start, funds regained the lost ground. Asian and Japanese funds outperformed. Their markets were both boosted by reflation and a favorable flow dynamic. Though US markets remained caught in their YTD trading range, managers continued to extract alpha. Dispersion in US equities continued to shrink, with the exception of sectors going through M&A activity. However, better fundamental pricing emerged. In particular, stock prices appeared more correlated to the quality of individual EPS releases. In contrast, European markets remained predominantly macro and thematic driven. This provided quantitative funds with profitable intra-month trading opportunities.

>> Vibrant M&A activity was the hot topic in the Event Driven space, offering tailwinds to Merger Arbitrage funds, and to some extent, exit opportunities for some corporate situations. Global M&A operations topped $1.8 trn YTD. In the US it spread to a larger set of sectors, including pharma, media, energy and technology. True, the universe of profitable and tradable deals remained constrained. But within that universe, deal spreads offered more potential, thanks to more complex deals and bidding wars. In particular the break-up of the TWC-Comcast operation, followed by the counter-offer on Charter Communication, was adequately arbitraged by Lyxor Merger arbitrage funds. On average it accounted for 3% of the funds' exposure. Exposures to the Direct TV and Lorillard deals were, in contrast, substantially higher: on average 9 and 7%, respectively. All else equal, the Special Situation was rather driven by idiosyncratic moves, none of great magnitude. Event Driven have successfully navigated the rotation spanning over April and May. Their natural exposure to the more resilient US markets, and hedges via indices and exposure on Gold mining operations offset part the market drag.

>> The Lyxor L/S Credit Arbitrage index was up +1% over the month. Credit markets were relatively isolated from the macro rotation. Spreads displayed high resiliency. Continued stabilization in oil prices and the curve steepening benefitted to the energy and financial credit sectors, two key themes played in the US by L/S Credit funds. They made up for a constrained alpha environment. Indeed, dispersion in Credit continued to mean revert while remaining macro driven. In contrast, European markets benefited from greater fundamentals and a lagging cycle, but trading was challenged by QE distortions and the Greek interminable negotiations.

>> CTAs underperformed, the bulk of the drawdown was endured during the first week. This brought the long term models’ YTD performance back to +1%. The macro rotation impacted most of their key positions: their long USD positions, their long US and EU bond exposures, their shorts on commodities. Funds’ return dispersion was a function of the calibration of stop losses, exposure diversification and the speed of repositioning. Over the month, portfolios were profoundly reshuffled, ending with far lower risks. In aggregate, the net exposure was cut by half, most of it allocated in a relative value style. Relative value in bonds: short Euro bond, slightly long US bond. Relative value in FX: long GBP & AUD, short JPY & EUR. Relative value in Commodities: long Metals and Soft, short Precious, neutral Energy. The bulk of their directional risk concentrated on Equities.

>> The Lyxor Global Macro funds were up +1.9%: an impressive performance considering the violence of the macro rotation. They were adequately positioned, in a hedged approach. In aggregate, they were long US bonds, but short EU bonds. They were neutral in Energy but long precious metals. Their main losses concentrated in Euro and US rates.

>> “Markets entered a phase of reality check, with the US economic strength and the sustainability of the early reflation’s effects under scrutiny. Favoring relative value styles until this phase is completed”, says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.

Lyxor’s Alternative Investment Industry Barometer, 10 June 2015


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