The Lyxor Hedge Fund Index gained 1.0 per cent in July (+1.5 per cent in 2012), with 12 out of 14 Lyxor Strategy Indices ending the month in positive territory, led by the Lyxor Long Term CTA Index (+3.2 per cent) and Lyxor L/S Equity Statistical Arbitrage Index (+2.1 per cent).
Hedge funds gained traction as market choppiness diminished. Risk assets, especially equities, traded in a range as markets alternated between optimism and pessimism.
While the major indexes ended the month higher, the bigger theme for hedge funds was the lack of violent shocks. Themes in the market generally played out over a few days rather than lurching from one extreme to the other each day. This dynamic played to the strengths of hedge funds.
Trend-following managers and equity market neutral managers were the biggest beneficiaries of this exhausted market environment. CTAs focused on medium- and long-term trends finished the month with a 3.2 per cent gain. Long bond positioning explains a significant amount of the success, but managers with long agricultural commodity exposure were the outperformers due to the extreme moves caused by the worsening drought conditions in the US. Managers running short-term models gained 1.2 per cent. Statistical arbitrage and equity market neutral managers posted gains of 2.1 per cent and 1.8 per cent, respectively.
Credit-oriented funds continued their rise, aided by coupon clipping. The attractive yields provided by non-investment grade debt benefited credit funds, but a stabilizing environment with slightly improved valuations also helped. Long/short credit funds gained 0.8 per cent and convertible arbitrage managers gained 1.1 per cent. Fixed income arbitrage specialists gained 0.2 per cent to boost their year-to-date performance to 5.9 per cent.
Managers in the event driven space struggled to keep pace. Merger arbitrage managers were down slightly as some extremely tight spreads widened. The Lyxor Index declined 0.3 per cent. Managers were able to reallocate to more attractive new deals that surfaced during the month, teeing up potential performance in future months. Special situations managers gained 0.3 per cent, with losses in gold mining stocks seriously denting the performance of some funds. Distressed managers declined 0.2 per cent.
Many long/short equity managers remain sceptical about playing a rally and underperformed the indexes.
Long bias managers gained 1.2 per cent while variable bias managers were flat on the month. The long bias index performance for the year now stands at +5.6 per cent. The outperformance of energy stocks strongly benefited managers with a tilt in that direction.
Global macro funds rebounded from June’s losses with strong performances attributable to commodity exposure. Notable themes that paid off included long exposure to energy, especially crude oil, and to gold.
“After several months of negative newsflow, US and Chinese data released in July has clearly surprised on the upside. This has led to a more favorable investment environment where asset prices have been less driven by emotions,” says Stefan Keller, head of managed account platform research and external relations at Lyxor AM.
