Stefan Keller, Lyxor Asset Management

Managers’ increased market beta exposure to financial and cyclical stocks points to improved risk sentiment

Wed, 06/02/2013 - 17:07

A forensic examination of performance, by strategy type, shows that 2012 was a hugely successful year for many hedge fund managers, says Stefan Kellar (pictured), Head of MAP Research at Lyxor Asset Management. 

Speaking with Hedgeweek at the Lyxor 5th Annual Hedge Fund Research Conference in Paris, Keller said that apart from CTA performance, which proved a drag, overall hedge fund performance was good and to suggest that hedge funds didn’t deliver is “simply wrong”.

“Virtually every strategy was up last year apart from CTAs, and some strategies did exceptionally well: long/short credit was up 12.14 per cent on the Lyxor MAP, fixed income arbitrage, long/short equity, long-biased funds; all ended the year with double digit returns.”

This is the advantage to running the world’s largest commingled managed account platform: Keller and his team are able to get a detailed picture of the performance of every one of the 100-plus funds, and track precisely when, and to what extent, managers react to market conditions; in particular the changes in exposure levels.

With that level of detail at hand, Keller confirms that last year around two thirds of all funds on the platform harvested positive returns. Having such a diverse range of good performing managers is a central feature of Lyxor’s value proposition as it means that Fund of Fund investors have the capacity to deliver for their own end-investors.

Says Keller: “Diversified FoFs that allocate into our platform were able to generate 4.5 per cent performance, while more focused FoFs returned 6 per cent. Those that chose to focus just on emerging managers returned close to 9 per cent.”

One of the key barometric measures of manager sentiment is the degree of market beta exposure they choose to hold: the higher it is, the more bullish the sentiment. Keller observes that 26 July 2012, when Draghi delivered his speech saying that the ECB would do whatever it takes to preserve the Euro, was a clear inflection point. Whilst many managers remained initially sceptical – with market beta levels largely unchanged – the ECB press conference in September was enough to convince them to move accordingly.

“Back in July 2012, average market beta exposure taken by managers was just 8 per cent. That figure is now roughly 30 per cent so it’s a significant jump. You have to go back to May 2011, before the EU crisis, to see market exposures of a comparable level,” confirms Keller.

Drilling down to the sector level, long/short equity managers tend to have a net long exposure to financial stocks, both in the US and Europe. At 15 per cent (as of 22 January) these levels are the highest seen since 2009. These are particularly high beta stocks and underlines the fact that managers are satisfied that, although not completely removed, systemic risk in the financial sector has at least been temporarily postponed.

Cyclical risk is more prominent. In the background remain threats to a successful resolution of the US fiscal cliff, China’s economy slowing down, and Europe’s ongoing recession. Managers have therefore been a little slower putting risk back on in cyclical stocks such as industrials, basic materials, mining stocks, consumer cyclicals etc.

“Whereas end-2011 marked a low point in exposure to financials, following which we’ve seen exposure levels gradually creep up, in cyclicals managers were downsizing their exposure up until June last year, since when they’ve started increasing their exposure again.

“So right now market beta exposure to both financials and cyclicals is rising. What this is telling us is that risk appetite is growing. What is particularly interesting is that when we look at our managers’ exposure to cyclical stocks, implicitly they are telling us that there will be some upgrade in global GDP expectations.”

If a clearer market direction emerges in 2013, and the equity markets enjoy a more sustained rally, this will naturally benefit trend following CTAs who suffer in frothy markets where short-term trend reversals dominate.

“Their systems are indicating that a trend is starting to emerge in rising equities and rising bond yields. That means the CTAs have necessarily become long equities and short bonds,” adds Keller.

Given their strong performance last year, long/short credit managers are confident of returning double digit performance again in 2013 according to the managers on the MAP that Keller has spoken to. He says that in terms of positioning the biggest net long exposure is in the single B rated bond space.

“Credit managers are moving down the quality ladder in order to harvest more yield. A typical long/short credit trade, currently, is to be long high yield bonds and short a triple-A sovereign or investment grade corporate bond in order to pick up the yield and get the carry.”

With US 10-year treasury yields anticipated to reach an upper limit of 2.40 to 2.50 per cent this year, there are early signs that economic growth could be on the road to recovery.

“There is a lot to be bullish about. Risk is back on the table, financial and cyclical sectors are attracting more market beta exposure, credit managers are taking on more risk with lower rated instruments. From our perspective, managers look to be positioning themselves in 2013 to continue to deliver on the positive performance they enjoyed in the second half of last year.”


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