Thu, 09/05/2013 - 10:05
The Lyxor Hedge Fund Index was up 0.8 per cent in April, bringing year-to-date performance to +3.2 per cent.
Twelve Lyxor Strategy Indices out of 14 ended the month in positive territory, led by the Lyxor L/S Equity Market Neutral Index (+3.9 per cent), the Lyxor CTA Long Term Index (+3.0 per cent) and the Lyxor Merger Arbitrage Index (+1.5 per cent).
Risk assets mostly rallied in April after a modest sell off in the beginning of the month and most hedge fund strategies generated positive returns for the month. Economic data continues to paint a picture of a mixed recovery with disappointing data in Asia and Europe and shallow growth in the US equity markets corrected about five to 10 per cent in mid-April due to disappointing macro news but data in the second half of the month rebounded slightly.
From a bottom up perspective, the Q1 earnings season in the US also firmed slightly from a weak start. Companies on average beat EPS estimates by six per cent whereas the pace was closer to three per cent at the start of the earnings season. Central banks also reminded investors that accommodative policies can be further eased if data remains weak. Risk assets rallied after the Federal Reserve noted it may expand QE if the data warrants it. The ECB was also more dovish than investors expected.
Strategy-wise, L/S equity funds generated positive returns in April and generally benefitted from the rally. Variable and long bias strategies were up 0.4 per cent and 0.6 per cent respectively benefitting from net long exposure to the market. L/S equity neutral strategies were up 3.9 per cent and showed the best performance in April. Correlation among stocks remains low at about 30 per cent and continues to provide a fertile environment for stock picking on both the long and short side. Additionally, earnings season is providing company specific catalysts for additional dispersion.
Event driven strategies performed well with merger arbitrage strategies up 1.5 per cent in April, distressed up 0.8 per cent and special situations up 0.1 per cent. Merger arbitrage was helped by the general risk on environment where deal spreads mostly tightened. The pace of new deal announcements is disappointing given the level of cash on company balance sheets. Companies are generally focusing on returning money to shareholders via buybacks and dividends instead of making big acquisitions.
Credit funds generated strong performance with L/S credit arbitrage up 1.3 per cent and convertible bonds up 0.8 per cent as well. The compression of spreads and lower bond yields continued in April which helped the strategies. New bond supply is outpacing last year’s level as companies take advantage of the low rate environment. This is highlighted by Apple’s record bond offering at the end of April which was in high demand despite the small premium over the risk free rate. Net fund flows remained positive, with loan funds continuing to see greater inflows than that of bond funds. In structured credit, new CLO issuance tumbled in April as new regulation was enacted that now requires banks to take a larger capital charge for such assets (legacy CLOs are not subject to the new guidelines).
Long term CTA strategies did well in April with the average fund up 3.0 per cent. Long and medium term trends persisted in many markets as equity prices climbed while bond yields and commodity prices declined. Short-term CTA’s performance was weaker with the average fund down 0.9 per cent. Short-term strategies were hurt by seesaw price swings in April caused by weaker than expected economic data.
“Market reaction remains liquidity driven and hedge fund exposures show that managers continue their constructive positioning,” says Stefan Keller, head of managed account platform research and external relations at Lyxor AM.
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