Stefan Keller, Head of Managed Account Platform Research at Lyxor.

Fewer hurdles, more dispersion for hedge funds in Q1

During the first quarter of 2012, the Lyxor Hedge Fund Index was up 1.5% (-0.5% in March), characterised by increased dispersion among Hedge Fund strategies in March: +0.6% for Lyxor Merger Arbitrage Index vs -0.35% for Lyxor Special Situations Index within Event-Driven space, -1.6% for Lyxor L/S Equity Variable Bias Index vs +0.6% for Lyxor L/S Equity Long Bias Index.

A key driver of hedge fund performance during March 2012 was the divergence of economic fundamentals. The US economy continues to exhibit moderate growth, while Europe and the Emerging economies show signs of softening relative to expectations. The generally better tone to markets also led to a sharp selloff in precious metals and strong moves in some currencies versus the US dollar. The divergences provided opportunities to exploit; they also served to differentiate among managers.

Consistent with the relative economic performance, equities in the US were most favoured among the various regions of the globe. Even within the US, variation among equity sectors was strong: diminished macro dominance meant that fundamentals were reasserting themselves. For example, energy shares were sharply down, industrials and materials lagged, and financial stocks made exceptional gains.

Within the Event Driven space, Merger Arbitrage managers generally experienced spread tightening on the back of a less stressful environment. US deals benefitted the most, but portfolios incorporating European and other non-US deals were less supported due to far weaker equity markets in those regions. Performance of the Special Situations index was strongly skewed by exceptionally weak performances of managers with significant precious metal exposure. Aside from them, special situations managers generally performed strongly, with both systematic (beta) and idiosyncratic (alpha) gains to their portfolios.

The Lyxor L/S Credit Index was virtually flat on the month. High Yield spreads, having trended persistently downward for several months, ended the month somewhat higher. Despite this, bond picking allowed for many managers to post small positive returns. Pressures in emerging markets were responsible for declines among some managers.

Long-Term CTAs were typically long bonds and long equities in March. This combination led to the Index declining 1.7% as the downward moves in bonds and non-US equities dominated their portfolios. Some Short-Term CTAs were able to pick up on the mid-month rally in US and European equities, but they could not hold onto the gains toward the end of the month. The Lyxor Global Macro Index declined 0.3% in March, but is up 1.6% for the first quarter. Managers specifically positioned for US growth outperformed those with more balanced books. The Fixed Income Arbitrage Index gained 0.5% (4.2% year-to-date).

The Lyxor L/S Equity Long Bias Index gained 0.6% (6.9% year-to-date), with far more dispersion among top and bottom managers than was typically seen in 2011. The Lyxor L/S Equity Variable Bias Index declined 1.6%, but this disguises the strong performance of the top managers. Long exposure to emerging markets, precious metals, or lagging sectors generally explains the exceptional performance of laggards. Market Neutral funds stabilized a bit after a slow start to the year; the Lyxor Index gained 0.7% for a year-to-date gain of 0.6%. The L/S Equity Statistical Arbitrage Index was flat.

March confirmed the increased risk appetite of Hedge Fund managers and investors. “The median Hedge Fund on the Lyxor Managed Account Platform registered a peak of 25% in equity beta, its highest level since May 2011, when doubts over the sustainability of public finances in the European periphery aroused”, says Stefan Keller (pictured), Head of Managed Account Platform Research at Lyxor. “However, we saw managers starting to take off some risk during the second part of the month.”

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