The Lyxor Global Hedge Fund index was up 0.05 per cent in August, lifting year to date gains to 0.8 per cent.
Equity markets were severely hit as major economic indicators faltered. Markets became fearful of a sharper than expected growth slowdown and the rising probability of a double dip in the US economy weighed on risky assets.
In such a context, beta exposures were a strong performance detractor. Long short equity managers were down by 1.5 per cent in the long bias segment and by one per cent in the variable bias one. Even though this negative performance is disappointing, it still compares quite favourably with the close to five per cent decline in US equity markets.
This relative resilience compared with indices can be traced back to lower gross exposures (146 per cent in August compared with 175 per cent in April). As for net exposures, they have been somewhat increased since the start of the year (around 28 per cent in August after 17.5 per cent in January), but remain historically low for the strategy.
Selling pressure hit stocks across the board in August, resulting in extreme correlation levels. Implied correlation on the S&P 500 jumped to nearly 0.80 by mid-month, to be compared with 0.64 at the start of the year. This was very detrimental to statistical arbitrage models, down by 1.4 per cent this month.
In the event driven space, special situations managers suffered from their positions on the financial segment, which was hit especially hard during the overall market downturn. The strategy lost 1.3 per cent. Merger arbitrage fared much better, up by 0.3 per cent, as M&A activity picked up, in particular in the technology sector, were a large cash deal was favourable to the managers on the Lyxor platform.
Distressed managers were also up by 0.2 per cent. Hedging positions managed to offset losses in the basic materials and communication sectors.
Long/short credit managers gained 0.8 per cent, confirming that credit is this year’s best performing strategy, up by 8.5 per cent year to date. Convertible bonds managers additionally benefited from their equity hedges and gained 1.9 per cent.
The “long bonds” theme was also profitable for global macro and long term CTA managers. In both these strategies, the risk budget on equities is very low, so that they were not hit by the market sell-off. Performance was of 0.6 per cent and 3.9 per cent, respectively.
