Stefan Keller, Head of Managed Account Platform Research & External Relations, Lyxor Asset Management

2011 – A year for machines, not for men

As 2011 draws to an end, it is interesting to note that eight of the Top 10 performers on the Lyxor Managed Account Platform (Lyxor MAP) belong to the systematic and model-based kind of managers. Machine 8 – Men 2, says Stefan Keller (pictured), Head of Managed Account Platform Research & External Relations, Lyxor Asset Management…

The fourth quarter bears testimony to an investment environment where emotions have indeed not been easy to control: market stress has forced EU policymakers to take more positive steps than usual at their summits; one US broker dealer filed for bankruptcy; the Greek Prime Minister called for a local referendum on the measures decided to help his country; the ECB cut its main interest rate on the third day of the new Super-Mario Draghi-presidency (who said that he would expect a ”mild recession” in the region… not so super); the Eurozone exit has become an option for the most senior EU officials, however aggressively against such a plan they are; Greece withdraw the idea of holding a referendum, etc.

Dispersion

Another feature of the past year was the rise in performance dispersion. Given the variety of uncertainties faced by market participants during 2011 (e.g. MENA unrest, Fukushima, Greek episode, US downgrade, Eurozone drama, counterparty risks, bank funding stress, Washington gridlock, enlargement of the monetary policy toolbox to name just a few), one should not be surprised by the increase in dispersion of fund performances during 2011. We have been digging into the data available for the Lyxor MAP since early 2003 and the result is rather striking.

Performing cross sectional analysis reveals that fund performance dispersion has been creeping up steadily since spring 2010 to a level not seen since July 2009. Hand in hand with the rising trend in performance dispersion is the number of “event weeks”, where annualised standard deviations print above double-digit levels. Another way to look at funds performance dispersion on the Lyxor MAP is to measure, week after week, the spread between the best and worst performing fund. This measure gives an idea about the extremes observed on the platform but does not capture the breadth of the dispersion among the 100+ funds. It turns out that the extremes reached this year are remarkably high: over the last nine years, only the aftermath of the Lehman collapse has triggered spreads in funds’ performance higher than now on the entire platform. Digging into details by strategy, we note that CTAs have delivered a spread of 51 percentage points between the best and worst performer, Global Macro 48 points, Event Driven 37 points and L/S Equity 31 points. These statistics are somewhat at odds with investors’ response in recent weeks: flows have been heading into those strategies where fund picking is currently most challenging.

What’s next?

While fiscal austerity will ensure stagnation of the Eurozone economy over the coming quarters, deflationary forces remain at work in the region. National bond markets will respond by incorporating a risk premium as long as a Eurobond market (read: further regulatory and fiscal integration) has not been launched. The lack of political cohesion and the upcoming presidential election along with refreshingly positive cyclical data could move the spotlight away from Europe towards the US We are not sure that this will be less emotional. Rules vs. Discretion may continue to drive performances in 2012.

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